Issue118:2017 08 17:Week in Brief Financial

17 August 2017

Week in Brief: BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

THEY’RE OFF:  It may be a quiet time of year for business, but this season also seems to be a bad one for closing already announced deals.  JOHN MENZIES said last March that it was in detailed discussions regarding the sale of its logistics and distribution business to DX, which is also a distributer and is listed on AIM.  John Menzies’ distribution business is focused on time sensitive print deliveries, historically especially newspapers, though that end of the business has considerably declined.  In its attempts to diversify into parcels and services to retail customers it has found the going tough and wants to concentrate on what it now sees as its core business, and one with long term growth potential, aircraft refuelling and servicing.  But it seems DX is also struggling and is now reorganising after a year in which performance was flat.  The Menzies deal would have meant Menzies ended up owning 65% of DX, a proposal not viewed with joy by DX’s largest shareholder Gatemore Capital Management, who own 21% currently.  The reorganisation caused Menzies to look at the deal again, and decided that it did not want to do it after all.  It had already adjusted the terms in June, but now says it is off altogether; so back to the warehouse for both parties.

Meanwhile, J SAINSBURY also seem to be walking away from a transaction that looked as though it was a done deal.  This is the acquisition of Nisa Retail, which is essentially a cooperative chain of local grocers – 1,400 of them – who own shares in Nisa and trade under their banner, also using their central buying strength.  Nisa’s trading has been struggling a bit but the sale to Sainsbury was not popular with many members, who however had limited powers to block it due to the complex control structure of Nisa.  But now Sainsbury have said that they are unlikely to proceed on the original timetable (Sainsbury’s exclusivity expired last week) because of the impending review of competition issues in the retail food business – initially triggered by Tesco’s proposed acquisition of Booker Group.  That means that Coop Group, who were keen to see if they could buy Nisa but could not then meet the Sainsbury price, are back talking, at a price said to be about £140m, slightly more than the Sainsbury offer.  The Nisa members are thought to greatly prefer a Coop purchase, which they see as much closer to their own ethos.

Yet another party walking away, albeit rather too late, this time from Air Berlin.  ETIHAD, the major Gulf airline which also had a strategy of investing in other airlines to bring business to its hub in Abu Dhabi has been the main backer and largest single shareholder (29%) in the discount airline.  Air Berlin rose rapidly to build a cross European network of shorthaul destinations and became popular with customers for its simple but friendly (and cheap) approach.  But it has been caught by the intense competition in the budget end of the shorthaul business –  and also suffered from delays and cancellations due to airtraffic control issues in Europe and capacity crunches in some European airports – that meant passenger  numbers dropped nearly a quarter last year, and revenue more so.  Etihad has continued to support the airline, putting €250m into the business this past spring.  But last week it said that it had been asked for more cash and had decided it could not justify that, so Air Berlin is now in administration.  For Etihad this is double bad news – it was a major investor in Air Italia which also went into administration earlier this year.  Although the German government have promised temporary funding, that seems to be to allow a controlled wind-down of the Air Berlin business, and possible sale of some parts.

NOT ALL FALLING OUT OF BED: One deal that does seem to be slowly proceeding is Wood Group’s takeover of Amec.  That transaction has been bedevilled by competition concerns.  The Competition and Markets Authority (“CMA”), which had to be consulted because of the significant exposures of both parties to North Sea oil and gas servicing, said that they would raise no objection if Amec disposed of its North Sea related business. That is under way; Amec says there is a good list of buyers available and it expects to agree a sale by the end of September.  That may not get the CMA totally on side.  It says it will hold a public consultation before making a final decision in the autumn and that could still lead to a full enquiry into the deal, but both Wood and Amec think that the service unit sale will get them over the approval line to close the deal by Christmas.  Amec needs to make that sort of timetable – it is short of capital and was about to hold a £500m rights issue before Wood made its offer.   It published its first half results last week, and although it has returned to a profit of £77m (loss of £446m in the comparable quarter last year) overall revenues fell by nearly 20% – most of that being due to reduced business in the North Sea unit.  Debt was down by £111m and the group said cost cutting was going according to plan

SITTING UNCOMFORTABLY:  First half sales were also down at DFS, the major UK furniture retailer, most of whose outlets are on out of town retail parks. The company blamed the fall of 4% on increasing competition combined with consumer’s reluctance to buy large priced items at a time of economic and political uncertainty.  This was the second profit warning given by the group and the share price responded accordingly, falling 6%.

POWER SURGE SOUTH WEST:  We flagged here a few months ago the intentions of a new business called Cornish Lithium, the bright idea of investment banker Jeremy Wrathall, to mine for lithium in Cornwall.  Mr Wrathall had procured licenses and support to drill on various sites on the south side of Cornwall, mainly old tin mines but also on the Tregothnan Estate, the extensive lands of the Boscawen family.  It is known that lithium, a vital but hard to find component of long life batteries, is present in Cornwall, which has the ideal conditions of granite and brine, but the question is whether it is in quantities large enough to make mining economic.  Mr Wrathall will soon know the answer to that question.  He has raised from three investors – all private individuals with backgrounds in metals and mining -the initial £1m required to drill trial mines and analyse whatever he may find.  Future episodes of “Poldark” may take a very unexpected turn.

KEY MARKET INDICES:

(as at 15th August 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, (unchanged): 3 month 0.28% (unchanged); 5 yr 0.72% (fall).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.10% (fall)

US$: 1 mth 1.23% (steady); 3 mth 1.32% (rise); 5 year 1.84% (slight fall) 

Currency Exchanges:

£/Euro: 1.10, £ sready

£/$: 1.29, £ weakening

Euro/$: 1.17 € weakening

Commodities:

Gold, oz: $1,270, slight fall

Aluminium, tonne: $2,029 rise

Copper, tonne:  $6,350, slight fall

Iron Ore, tonne:   $72.74, rise

Oil, Brent Crude barrel: $50.17 fall

Wheat, tonne: £147, steady

London Stock Exchange: FTSE 100: 7,382 (fall).  FTSE Allshare: 4,047 (fall)

Briefly:

Oil seems to be responding downwards to persistent chatter in the market that supplies are rising.  Rumours also on aluminium which continues to edge up – those are about China restricting supply.  And copper seems settled in a new range above $6,000. The interest rate and currency markets remain quiet.

 

If you enjoyed this article please share it using the buttons above.

Please click here if you would like a weekly email on publication of the ShawSheet

Issue 117:2017 08 10:Week in Brief Financial

10 August 2017

Week In Brief: BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

POWER BOOST:  As the government ponders what to do, if anything, about promises made to review consumer electricity and gas prices, here comes some more competition to the supply side.  It is serious competition indeed – Royal Dutch Shell, the oil drilling, refining, and retailing giant has applied for a licence to become a power supplier, and will start with a serious customer – itself.  It will supply its 550 petrol stations in the UK, along with its own offices and refineries (no word at the moment about whether it will be switching to electric engines in its road tankers).  It is unlikely,however, that it will sign up for your domestic supply – it is mainly aiming at the commercial market.  Shell has been pondering the changing nature of energy usage for a while and considering how to protect its long term business as direct (and probably indirect) carbon based demand diminishes.  It is building a large North Sea based windfarm off the Netherlands and is believed to be looking at further investments on the UK shore.  Other than that it does not yet have any direct electricity generation plants, but it has built up a power trading company which deals in the London energy market, for which purpose it buys direct from some solar farms and from both land and offshore wind farms That has enabled it to build a customer base to whom it supplies power as a trader.  But with a licence it will be able to enter the market as a direct supplier – and to build further plants knowing it has longer term contracts in place to take the output.

CITY BOOST:  City of London rental agents have been increasingly glum about short term prospects for rental and value growth in the Square Mile, with muttering from various City occupiers that they may have to move some of their operations into the Eurozone after Brexit, with heavy knock on effects on a market that is already looking at record amounts of new offices under construction for delivery over the next three or four years.  But the gloom lifted a little at the end of last week as Deutsche Bank announced it had signed a 25 year lease for a new London HQ.  The building on Moorfields is 450,000 square feet and is currently a site preparing to begin construction – indeed the new lease is signed subject to the developer, FTSE100 company Landsec, getting detailed planning permission.  The bank has about 5,000 people working for it in London, but currently in several locations; the new building, to be ready in early 2023 (again subject to planning) will accommodate all of them.  Whilst this is very welcome news for the City market, and indeed for the City itself which seems to becoming once again bankers preferred choice as against Canary Wharf, its eastern rival, things are not on the upturn yet.  Some organisations such as Lloyds Banking Group are looking to reduce City occupational levels and move staff out to the provinces, where rents, and living costs, are lower.

WINDIER AND DEEPER:  Regular readers will know that this column takes a keen interest in sources of electrical power generation; as the world looks increasingly to “clean” sources of energy – and uses a lot more electricity – meeting the growth in demand from sources which are per se less efficient, with citizenry who oppose many developments to provide new sources of generation, is becoming a real challenge.  But there is sight on the horizon of a possible large scale solution to this – or more properly, beyond the horizon.  The Norwegian state oil company, Statoil, is looking to the long term, thinking about how it will maintain its business and its earnings when the oil runs out.  It has invested heavily into a project to build wind turbines – not the land and in-shore type, but true deep water turbines which can float in deep oceans, anchored to the sea bed but well beyond sight of land (and land based protestors) and also out of the way of most shipping lanes and bird life.  The principle is simple enough – the turbines have large keels, heavily weighted, so they will float upright; and will be connected to land by submerged cables.  There is much more, and more reliable, wind far out at sea, so the extra costs (not that much greater it is thought, if they get into mass production, than land turbines, as the latter require very expensive (and carbon rich) foundations), could be overcome, so they could be become a main source of supply by the mid 2020’s.  Six turbines will shortly begin generation about sixteen miles off north east Scotland, and another facility is been built ten miles off Aberdeen.  These are not that far offshore, it is true, but they are in the nature of trial projects and need to be close enough to monitor.  If they prove themselves, then the next installations could be much further out.

DON’T DRIVE AND EAT: But drive to the drive-through and drive away with a Greggs. Greggs, the traditional Newcastle-upon-Tyne headquartered bakery with a shop in almost every high street is moving into the drive through business, emulating MacDonald’s whose car sized golden arches it wishes to challenge. At the moment Greggs has just one drive-through outlet, in Manchester, but it has worked well, so the bakery chain is looking to roll out the model, it said, announcing good growth in the half year to July 1st with sales up 7% to a touch over £450m. Of that increase, about half was from existing outlets and half from new outlets. Greggs is also enlarging its range, diversifying from pastries and sandwiches to salads and healthy drinks. But it may have to move faster to keep up with the Big Mac who said recently it is now looking at home delivery to challenge the threat posed by the choice from such delivery specialists as Deliveroo.

NEVER WORK WITH: …children and animals, says the old saw. But Pets at Home are proving that at least partly wrong. Pets at Home does exactly what is says on the (pet food) tin – it provides everything you could possibly want for almost every type of pet that might be found in the home. It operates mainly large sheds on retail parks, the reasoning being that pet owners are happy to stock up just occasionally and to drive to their local retail park to do it. Recently it has added veterinary services to the retail offer – and now grooming parlours for the well turned out dog or cat (or even terrapin, perhaps). Those new additions have tended to be the strongest trading parts of the group, but recently Pets have taken a new line on their core businesses – cutting out special offers and promotions and going for consistent low pricing. That seems to be paying off – the latest four month figures, to 20th July, show sales up 5% overall, and on a like for like basis up 2.7%, (the difference reflecting the opening of five new stores). The veterinary division is still top money spinner though, like for like up 11%, but 19% up adding new openings.

KEY MARKET INDICES: (as at 8th August 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, (unchanged): 3 month 0.28% (unchanged); 5 yr 0.73% (fall).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.12% (fall)

US$: 1 mth 1.23% (steady); 3 mth 1.31% (steady); 5 year 1.86% (slight fall) 

Currency Exchanges:

£/Euro: 1.10, £ weakening

£/$: 1.30, £ weakening

Euro/$: 1.18 € steady

Commodities:

Gold, oz: $1,272, slight rise

Aluminium, tonne: $1,980 rise

Copper, tonne:  $6,363, slight rise

Iron Ore, tonne:   $69.09, 10% rise

Oil, Brent Crude barrel: $52.41 slight fall

Wheat, tonne: £147, rise

London Stock Exchange: FTSE 100: 7,494 (rise).  FTSE Allshare: 4,102 (slight rise)

Briefly:

Steady market again, but much chat around oil (where gossips suggest supplies are quietly rising) and aluminium – where there is talk that the Chinese, now major players in the refining intermediation part of the market, are cutting back on environmental grounds.  That seems a bit unlikely but the aluminium price has moved up.

 

If you enjoyed this article please share it using the buttons above.

Please click here if you would like a weekly email on publication of the ShawSheet

Issue 116:2017 08 03:Week in Brief Financial

3 August 2017

Week in Brief:BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

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.

 

If you enjoyed this article please share it using the buttons above.

Please click here if you would like a weekly email on publication of the ShawSheet

 

Issue 114:2016 07 20:Week in Brief Financial

20 July 2017

Week In Brief: BUSINESS AND THE CITY

Headline image saying £NEWS

ITS BENEATH YOU: Alternative energy continues to emerge from all sides. The latest challenger to oil is geothermal energy – gathering heat from hot rocks deep below the earth’s crust by pumping water through them for conversion into steam to power turbines, or to use directly as hot water.  Iceland is the leader in this source of power and heat – about 60% of her power requirement comes from such sources – and Italy is also starting to see a measurable contribution from sources in the Alps.  After several false starts – most of which failed on cost – the UK looks as though it may be close to exploiting similar sources.  Technology has in this area, as in so many, meant that the costs of deep rock drilling and utilisation is much reduced from what it was thirty years ago, and local power generation is much more feasible within national power networks.  Abundance, an investor in alternative power sourcing, is most of the way through a crowdfunding investment drive to raise £5m to complete a £18m fund to drill the UK’s first commercial geothermal power source.  Only £5m is to come from the risk taking public directly; £10.6m is coming from an EU fund, and £2.4m from Cornwall County Council – the site of the power station is in Redruth, Cornwall.  Cornwall has perfect geology for geothermal power – it is sitting on very deep granite which (usually) produces reliable drilling, and is thus ideal for a trial project and to further refine the technology.

If the money is raised – about which Abundance is very confident, not least because it carries a 12% coupon – and providing there are no nasty surprises in the rock layers deep down, it is expected that the power station should be producing power by mid 2020.  If so, the initial investors will be refinanced by more conventional debt and equity.  The output will not be huge – Abundance forecasts enough for at least 1,500 homes (about 1 megawatt), but possibly up to 3 megawatts which would supply 4,500 homes, potentially taking care of the power needs of Redruth and the neighbouring town of Camborne.  A modern wind turbine has an output of about 1 megawatt, but geothermal power is much easier to manage – it is constant and can be switched on and off to cope with needs, rather than just working when the wind blows.  And it has a much less intrusive effect on the environment.  Cornwall has, as United Kingdom locations go, a good supply of wind – too much in the winter, but turbines are controversial in the beautiful landscape.  And Redruth and its neighbouring towns have suffered from the collapse of the tin mining industry. the main employer for a couple of centuries. Geothermal power will not produce a lot of jobs in itself, but it will mean that local power supplies are reliable and cheaper, thus encouraging new users and employers.

Abundance is likely to be followed soon by Cornwall’s most popular tourist attraction, the Eden Centre, which has several times attempted to raise finance to create such a power source directly beneath its garden and geodome site, both for its own needs and to supply power to the local town of St Austell, whose china clay industry would benefit from cheaper power.  In the longer term, most of Cornwall’s power sourcing could be from geothermal in a generation’s time or so.

DIGGING DEEPER: JCB:  The UK builder of construction machinery founded and still owner by the Bamford family has long been held up as an example of how UK businesses can succeed internationally.  Current market conditions are far from ideal for makers of construction machinery – activity has declined for several years in most major world locations, and JCB’s rivals such as Caterpillar of the USA have shown in their results the effects of this weak demand.  Not so the Uttoxeter based manufacturer – it has just released its 2016 results and turnover is up once again, by a remarkable 12% to £2.6bn, with EBITDA (earnings before balance sheet charges, tax and interest) up 34% to £287m.  The company said this is partly because of continuing expansion in India, now a key market and one that has largely kicked international declines, but also because of continuing heavy investment into improving and renewing its products.  As a privately held company JCB can take a long term view and plough back profits into future growth.  The company also agreed with construction industry analysts who say that there are signs that the decline in the business is nearing its end – expansion, and renewals of equipment whose replacement has been deferred, should help further growth.

CRACKS WIDENING:  Carillion, which was in the news last week as it revealed major write-downs on UK and Middle Eastern construction contracts and the departure of its chief executive, saw its share price fall a further 30% over the week, following a fall of 40% on the initial announcements.  Just at the moment the share price is probably the least of its problems (although it makes much more difficult a rights issue to raise new capital to plug what appears to be a larger financing gap than first anticipated).  The risk is that it falls into the classic difficulty of a  company in trouble –  ability to procure new contracts falling away as third parties worry about its future, existing customers seeking alternative contractors at any opportunity, and, most damaging in the short term, suppliers becoming reluctant to supply goods without up-front payment,  Withdrawal of normal credit terms can kill a company very quickly.  In the construction trade, with customers generally paying in arrears for work done, and margins very thin, closing off credit would be a very serious impediment indeed.  Word is that the company is trying to find a partner to stabilise its financial position, by takeover if necessary.  That is likely to mean a foreign bidder who wants to get into the construction sector on a large scale and has deep pockets in case further problems emerge.

SPORTING GAMES:  Mike Ashley, the straight talking, binge drinking (he said it, not us) boss of Sports Direct might be thought to have his mind pretty occupied at the moment with the court case he has been fighting over allegations of promises made to an investment banker.  But Mr Ashley can multi-task – Sports Direct has bought 26% of Game Digital, the video games company which has had financial issues following announcement of problems in the supply of Nintendo consoles, used by many of its customers to play on-line games.  Mr Ashley likes to buy on share price weakness, and whilst he has not announced what attraction he sees in Game Digital, it has a similar customer profile to that of the typical Sports Direct shopper, so there should be some good cross selling opportunities.

DON-NING THE GOWN:  Cambridge has won yet another accolade – it is officially the British city with the highest economic growth rate, having replaced Milton Keynes at number one.  Cambridge has invested heavily into all the current growth sectors – computer science, advanced engineering, and biological and pharmaceutical research and production, often on the back of the capital of the various colleges and the research of the university.

KEY MARKET INDICES:  (as at 18th July 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, (unchanged): 3 month 0.29% (slight fall); 5 yr 0.81% (fall).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.19% (fall)

US$: 1 mth 1.23% (rising); 3 mth 1.30% (rising); 5 year 1.87 (fall)

Currency Exchanges:

£/Euro: 1.13, £ steady

£/$: 13.0, £ strengthening

Euro/$: 1.15 € weakening

Commodities:

Gold, oz: $1,236, slight rise

Aluminium, tonne: $1,900 slight fall

Copper, tonne: $5,965, rising

Iron Ore, tonne: $66.09, rise

Oil, Brent Crude barrel: $48.61 rise

Wheat, tonne: £143, rise

London Stock Exchange: FTSE 100: 7,405 (rise). FTSE Allshare: 4,051 (rise)

Briefly:

Iron ore continues its strong recovery with back stocks being absorbed; copper also moved very close to the $6,000 mark. Sterling interest rates continued to disobey the Bank of England eyebrow wiggling and moved down; dollar short rates, in contrast, moved up.

 

If you enjoyed this article please share it using the buttons above.

Please click here if you would like a weekly email on publication of the ShawSheet

Issue 113:2017 0 13:Week in Brief Financial

13 July 2017

Week In Brief: BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

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

 

If you enjoyed this article please share it using the buttons above.

Please click here if you would like a weekly email on publication of the ShawSheet

Issue 112:2017 07 06:Week in Brief Financial

06 July 2017

Week In Brief: BUSINESS AND THE CITY

Headline image saying £NEWS

NO DIVIDENDS FOR GOING INTERCITY:  The number of passengers carried may be reaching record levels, and the railway network is probably in its best physical condition for eighty years, but profits are proving elusive.  In fact, rail earnings are at their lowest level for a decade, though that is generally shielded from the public (and investor) scrutiny because most rail franchise operators are part of larger groups and do not break out their rail operations in public financial statements.  However, Stagecoach, which operates both bus services and trains, came out of the tunnel this week to say that its surprise fall in earnings – down 83% to £17.9m for the year ended April 2017 – was mainly due to writing down around £130m on its Virgin branded East Coast franchise, which operates the east coast main line route from London Kings Cross to Edinburgh, and serves points between, such as York, Newcastle, and Leeds.  The east coast route, although one of the most prestigious and busiest in Britain, has a history of financial stress forcing owners into the ballast, beginning with Great Northern, its first franchisee, who had to hand the franchise back after running out of money.  When Stagecoach took it on there were mutterings that they had offered too much and it seems that that is indeed so – of the £130m, £84m relates to anticipated losses for the next two years. Stagecoach says the problems come from many sources – rising costs not matched by rising fares, the costs of heavy regulation which imposes penalties and costs on late running, and strong competition – the east coast is one of the few lines which does see significant competition between operators – with First Hull and Grand Central offering passenger choice.  In the current year passenger carryings were also down, which the company attributes to terrorism incidents and political uncertainty, especially impacting on high margin business travel.

LOST AT SEA:  Another headache for Chancellor Phillip Hammond: last year saw North Sea oil revenues turn negative, meaning that for the first time since the early 1970’s tax on revenues from the undersea oil has not supported government expenditures.  Oil has produced total tax revenue close to £200bn since the first rigs began pumping oil, but that has been declining for many years and currently is the lowest since exploration got properly underway in 1969.  Worse still than having no tax revenue,  under the structure of the Petroleum Revenue Tax oil companies can offset a proportion of decommissioning and scrappage costs (of their rigs and pipes) against tax paid which meant the Treasury paid out about £300m in the last financial year, which may be up to double in the current year.  Experts say this situation should reverse again soon as some new fields are opened up to the west of the UK, with also some gas likely to come on stream from new gas reserves in the North Sea, and as scrappage costs tail off.  But this all depends on the oil price.  If it weakens again, then revenues will of course be lower and that will drive taxable income down.

FLEET ORDER:  Good news for Glasgow, for the Royal Navy, and most of all for BAE Systems, the British engineering company.  It has just won a contract to build, over the next fifteen years or so, eight new frigates, with state of the art anti-submarine capabilities, to boost the Navy’s firepower in the key area of fighting mobile missile launch sites.  The initial commitment is for only three of the eight, which should be ready around 2024; work is due to begin this month.  This is all good news for not just BAE, but also for the steel industry and for designers and makers of advanced electronic control equipment, though not so much for tax payers.  The total (today’s value) contract price is £3.7bn.  The work should create 3,400 jobs over the prolonged period, many on the Clyde. It is also good news for Charles Woodburn who took over from Ian King as chief executive of BAE at the weekend. It was one of his first announcements.  The order follows on from the recent Clyde launch of the Navy’s super aircraft carrier, Queen Elizabeth, which will be followed by a similar ship.

DRIVING AWAY:  Elon Musk is no doubt the Henry Ford of our age, but, unlike Mr Ford, Mr Musk has developed a bit of a reputation for promising too much, too early.  His Tesla all-electric cars are beautifully styled and wonderfully environmentally friendly – but have a habit of turning up long after their promised availability dates.  When customers are ordering (and paying large deposits) well in advance, having to wait much longer than promised for delivery damages the brand and even creates concerns about the finance – though Tesla has been pretty open about its financial structures.  But Mr Musk has learned quickly – as he has in so many areas.  His new mass market model, the Model 3, is due to start deliveries on Friday 28th this month, two weeks ahead of the promised date. The car costs around US$35,000 and is the real game changer for Tesla, following its sports and luxury models, the S and the X, as it will turn the California carmaker into a mass market producer. That is almost assured – 400,000 potential owners paid deposits on the Model 3 soon after it was announced and pre-sales have risen further since.  Output is rising fast on the production line from an initial 1,500 a month or so to hit the target of 20,000 a month by the end of the year. The US stock market was pleased to hear that Tesla is getting it together – the share price has risen by two thirds this year and Tesla is now the most valuable car maker in the US; and has the strongest brand loyalty.

NOT ON POINT:  More problems at Hinkley Point.  EDF who are building – are about to start building – the huge nuclear reactor which will be a key component of the UK’s renewed nuclear energy programme say that their estimates of costs have gone up a further £1.5bn, and that delivery of the project could be delayed by a further year or more (it was supposed to come on-stream about now, but is now looking to be in production in about ten years’ time).  EDF is now pretty much locked into the project and increased costs and further delays are for its own account, so will continue to drive down anticipated returns.  The company denied rumours from industry watchers that this might be the beginning of attempts to get out of the project altogether.

SCALE ELECTRIC:  It was inevitable really.  Porsche are developing self-drive technology, as is every major car manufacturer.  But the German sports car maker is going one step further – it intends to self-drive cars round a number of major racing circuits using the ultimate performance of the cars.  Then car enthusiasts will be able – virtually or in reality – to drive the track to see how close they can get to that supposedly perfect performance.  Soon we shall all be racing drivers…


KEY MARKET INDICES:
(as at 4th Julye 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

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

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.16% (rise)

US$: 1 mth 1.04% (steady); 3 mth 1.20% (steady); 5 year 1.97% (rise)

Currency Exchanges:

£/Euro: 1.14, £ strengthening

£/$: 1.29, £ strengthening

Euro/$: 1.13, € weakening

Commodities:

Gold, oz: $1,223, fall

Aluminium, tonne: $1,854 rise

Copper, tonne: $5,893, rise

Iron Ore, tonne: $62.50, sharp rise

Oil, Brent Crude barrel: $49.71 rise

Wheat, tonne: £147, rise

London Stock Exchange: FTSE 100: 7,378 (slight fall). FTSE Allshare: 4,029 (slight fall)

Briefly:

The markets generally showed some strengthening this week – iron ore positively bounding back up as China made positive noises about output.  Oil continued to move back up – and Mr Carney waggled his eyebrows and the market obeyed, pushing five year interest rates sharply up, with sterling following.

 

If you enjoyed this article please share it using the buttons above.

Please click here if you would like a weekly email on publication of the ShawSheet

Issue 111:2017 06 29:Week in Brief Financial

29 June 2017

Week In Brief: BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

IN THE PUBLIC GAZE:  Two big property companies were the talk of the market this week; one you have probably heard of, one you probably haven’t.  The well-known one is Hammerson plc, founded in the 1950’s and now the third largest propco in the FTSE100, and an owner of shopping centres around the UK, the best known of which are to the north and south of London – Brent Cross on the North Circular Road, and the Whitgift Centre in Croydon.  Now John Whittaker, one of Britain’s richest but most low profile tycoons has built up a nearly 5% stake in Hammerson through his private property company, Peel Holdings.  Peel is reputedly the largest property company in the North West (though little known outside the industry) which Whittaker has built up from nothing over his long career.  Whittaker also owns over a quarter of Intu, another major shopping centre owner – and Peel itself owns the Trafford Centre just outside Manchester, the main out of town retail centre in the north-west.  Mr Whittaker is saying nothing, but the analysts are speculating that a three way merger of such interests would create the largest force in out of town shopping in the UK.  Being a retail landlord is a very sophisticated business nowadays – tenants and suppliers like to deal with large landlords who can take an overall picture of their business, reflect and work with them in changing shopper needs, run big advertising campaigns, and use their purchasing power to secure economies on purchasing such essentials as electricity and water.

THE SON ALSO RISES:  Carpetright, the national carpet retailer founded by serial entrepreneur Lord (Philip) Harris published very disappointing results for the year ended April 2017.  Profits were down 93%, to a mere £900,000, though sales were almost static, showing that margins have been slashed right to the underlay.  The group also took a hit to the bottom line by making an £11m provision for lease obligations on 43 stores, all of which are lossmaking and many of which are in the process of being closed down (some will be refurbished and relaunched).  Although the group said turnover was slightly up in the second half of the year and more so in trading so far this financial year (up 2% in the seven weeks so far reported), the outlook on margins is still difficult.  Lord Harris retired from the group three years ago and was replaced as chief executive by Wilf Walsh, previously at HMV and Coral Bookmakers.  He is refurbishing some stores and working his way through the viability of his 430 stores – carpets do not lend themselves well to on-line retailing.  But his programme has been hit by the rapid rise of a new competitor – Tapi, run by none other than Martin Harris, son of Lord.  It is around half way through a three year programme to open 200 stores and is targeting, of course, the strongest locations, which is what is giving Carpetright such a hard time.  If both chains are to prosper the British public is going to have to buy quite a lot more carpets.

NO SALE:  The sale of the Coop Group’s banking business, Cooperative Bank, has fallen through.  As mentioned in this column before this is one of the last hangovers from the 2008 banking crisis, when the bank got itself into trouble by aggressive lending, especially in the commercial real estate sector; it has struggled with a legacy of bad debt ever since.  Earlier this summer a sale seemed imminent and several bidders were said to be attracted by the bank’s retail network and loyal customer base, but in the end the problem was not the business but, as so often, the pension obligations of the bank.  That has proved insurmountable so the shareowners – Coop Group owning 20% and five hedge funds owning 80% between them, now have to move to plan B, which is to keep the bank and recapitalise it.  The Coop probably cannot afford any spare capital and will confine its role to underwriting at least some of the pension obligations, reducing its shareholding to somewhere between 5% and 1%, whilst the hedge funds capitalise some of their existing loans and create some new debt instruments, to inject new money of about £700m.  That should get the bank free of its obligations and able to trade and even to rebuild itself.  But in the long term the hedge funds will still want to be out, so presumably no well-heeled potential purchasers will be turned away.

LESS CREDIT:  The Bank of England has told lenders that they need to provide greater capital reserves on their retail (consumer) debt business.  Unsecured loans have been slowly increasing in size and number as Britain’s consumers continue to spend but with wage growth slowing, or stalled, depending which figures you believe.  But the real growth, and the Bank of England’s nervousness, centres around credit card debt which is growing fast.  Credit card debt is very expensive – over 20% annualised in most cases, 30% on some cards.  The best way to operate a credit card is of course to pay it off each month, even if that means having to take out a term loan to meet the card bill – or adding it to the mortgage.  But increasingly borrowers seem to be using their cards as a long term debt source and those are by definition the bigger credit risk.  The Bank thinks that in any downturn this would be a source of losses to the banks and thus wants another £11bn of capital to meet them.  The message is of course that the banks should be careful with credit card borrowers and look more closely at appropriate credit card limits.  Or even encourage their customers in the ancient art of saving.

JET FIRED:  Bad news for all of our readers with private jets – though an opportunity for any reader thinking about acquiring one.  The price of corporate jets has plunged as more and pre-owned models reach the market.  Many of these are not so new – the problem goes back to a time before 2008 when any top executive who wanted to be taken seriously was buying a jet, if not two, usually using external debt.  Although the supply of new jets has been falling over the last couple of years – the number registered in 2016 was half that of 2008 – there are just more planes than purchasers. Some of the rich boy’s toys are being sold by inadvertent owners – those that lent the money to buy them and have now found that depreciation has outstripped the amortisation of the debt. Having a corporate jet is not as popular as it was, especially with shareholders and regulators (or bankers presumably), so although many of the second hand ones seeking new owners are little used there still aren’t many eager new plane owners out there. The slump in prices – down 50% on a comparable basis – is also affecting the new market as manufacturers cut back on production, though those who charter their planes say that that end of the market is holding up – and that charterees prefer newer planes.

KEY MARKET INDICES:  (as at 27th June 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.30% (unchanged); 5 year 0.73% (rise).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.03% (steady)

US$: 1 mth 1.04% (steady); 3 mth 1.20% (steady); 5 year 1.79% (falling)

Currency Exchanges:

£/Euro: 1.13, £ steady

£/$: 1.27, £ steady

Euro/$: 1.12, € steady

Commodities:

Gold, oz: $1,246, modest rise

Aluminium, tonne: $1,854 slight fall

Copper, tonne: $5,770, slight rise

Iron Ore, tonne: $55.25, rising

Oil, Brent Crude barrel: $46.93 slight rise

Wheat, tonne: £142, fall

London Stock Exchange: FTSE 100: 7,437 (slight fall). FTSE Allshare: 4,063 (slight fall)

Briefly:

The markets are again back to generally narrow trading ranges; spot wheat fell although four month delivery prices are £4/tonne higher and rising slightly.  Otherwise it all looks like summer torpor, although those who study the ancient art of graphology might see the beginning of a recovery curve taking the oil price back up – not surprising given the current state of Middle Eastern politics.

 

If you enjoyed this article please share it using the buttons above.

Please click here if you would like a weekly email on publication of the ShawSheet

Issue 110: 2017 0-6 22: Week In Brief Financial

22 June 2017

Week In Brief: BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

BAD WEEK BEHIND THE COUNTERS:  Maybe the bankers are going to be regulated less (see our article on the US this week) but Barclays, the 300 year old UK domiciled bank, must be wishing it had thrown itself on the regulatory mercies of the Bank of England during the financial crisis.   Instead Barclays went for self-help, with an institutional capital raising including a major contribution from the Gulf state of Qatar.   The terms on which this was done have caused rumour and trouble ever since.   As much of it is subject to various bits of litigation we will not get into details here, but in the most simple terms the Qataris and others provided loans of around £7.5bn to Barclays which were structured so they could be included as capital in regulatory calculations, and thus gave the bank the ability to meet the regulatory tests and also liquidity to enable it to continue to be active in business and assure its depositors.   The support was not cheap but it got Barclays through and was in due course repaid.   Even in Barclays elements of this were controversial, as were other aspects of the bank’s business.   This led to several change of senior executive board members, including the sudden departure of Bob Diamond, regarded as brilliant but too drawn to risk taking to head a clearing bank, and Antony Jenkins, regarded as a steady pair of hands but not a sufficiently imaginative leader.   Now Barclays has a new boss, Jes Staley, and a new strategy – cutting off much of the minor business overseas, but rebuilding the investment banking side.

But the past is suddenly back – to start with, Mr Staley’s hiring strategy, which was to lure in bright talent from JP Morgan where he himself had worked. This was so pronounced that there was a bit of a row (or “a polite conversation” chairman to chairman as is said in the City) and Barclays agreed not to recruit any more staff from JPM. Now the US Justice Department is having a look at this – not objecting to the enticements, but the fact that Barclays agreed to stop. The Justice Department thinks this might breach anti-trust laws. Those of our readers who tango will be aware that it takes two, but at the moment the interest seems to be in Barclay’s role, not JPM’s, who say that nobody agreed anything improper.

Then Mr Staley was announced to be under investigation for matters relating to an alleged whistle blowing incident in the bank. And the bank is under continuing investigation by the US authorities relating to alleged mis-selling of securities instruments in the time leading up to the 2008 financial crisis, charges which Barclays very strongly rebuts.

But all those troubles were dwarfed by the events of earlier this week where the British Serious Fraud Office arrested four senior former Barclays men; ex-chairman John Varley, the aforementioned Antony Jenkins, Thomas Kalaris former head of the private wealth unit, and Richard Boath, then of the global finance unit, and charged them with various offences relating to fraud by misrepresentation. The bank itself has also been charged with similar matters. This all centres around what was made public to investors when the bank did its huge fund raise in June 2008. This raise was not just the £4.5bn or so put in by the Qatar parties but by several other large international institutions, and it is understood that the SFO is concerned not all investors may have been made aware of the same facts.

Not surprisingly, this has not helped Barclays share price, nor presumably its standing among some of its major customers, though no doubt on reflection it will be remembered that the allegations relate to matters nine years ago, and that none of the accused are now in positions in the bank. Mr Staley must be reflecting that he wished he had stayed at JP Morgan.

COKING UP A REVIVAL:  It’s an unlikely place to be a centre of power generation – but the English Lake District is making an increasingly important contribution to Britain’s energy needs.   The nuclear power station complex at Sellafield is of course closed and the two power stations on the site are in the process of decommissioning and dismantling (but a new one is under construction creating 21,000 jobs and costing £10bn), but also the site is the centre of dealing with spent nuclear fuel in the UK, a vital role in keeping the remains of the nuclear generation capacity operational.   On the Lake District fells are a number of wind turbines, and lots more are going into the Irish Sea catching the strong winds that sweep across the Irish Sea.   The concept of a barrage across the estuary of Morecambe Bay continues to be researched – and another two bays east and west of Barrow-in-Furness are suitable for barrages and could follow if viability can be proven and environmental factors satisfied.   And now there is hope of a revival of West Cumberland’s ancient coal mining industry.   West Cumbria Mining, a new venture owned by an Australian venture capital fund, is well advanced in plans to reopen and extend mining operations under the sea south of the port of Whitehaven to extract what are believed to be large reserves of high quality coking coal, a vital component of steel production which the world is getting short of.   The price of this has risen recently to US$ 300 per tonne, which is around twice the price needed for viable production, and WCM says it has initial orders for about 500,000 tonnes per year for export.   Two more potential customers are Britain’s only major steel works at Scunthorpe and in South Wales.   The mine has finance in place and it is hoped that it may be operational by the end of 2019.

MR CORBYN WILL BE PLEASED:  We have followed the troubles of Co-op group for some time, where its banking arm has become a major problem as it continues a steep and troubled decline.   But what the Co-Op Group, the parent company which historically is closely allied with the Labour Party, has just revealed is that its historic main business, the retail operation which operates a big chain of supermarkets in northern and rural England is doing very well, and last year turned over £9.47bn, just behind the John Lewis Group.  And membership (the Co-op is owned by its members) is up 700,000 which suggests increasing customer loyalty and more good figures to come.

FIGHT AT THE TILL:  But one potential source of easy growth seems to have escaped the Co-op.   It was hoping to buy Nisa, a cooperative itself, which is a group of around 1,400 shopkeepers with a central supply business.   The majority apparently want to demutualise, not surprising as some could get payments of over £600,000, but they have decided to run with J Sainsbury, who want to add to its corner shop offerings.   However the deal is not done yet and it may not be – there is said to be major opposition from some members who want to remain independent.

KEY MARKET INDICES:  (as at 20th June 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.30% (unchanged); 5 year 0.63% (rise).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.03% (fall)

US$: 1 mth 1.04% (steady); 3 mth 1.20% (steady); 5 year 1.82% (steady)

Currency Exchanges:

£/Euro: 1.13, £ steady

£/$: 1.27, £ steady

Euro/$: 1.12, € steady

Commodities:

Gold, oz: $1,244, modest fall

Aluminium, tonne: $1,861 slight fall

Copper, tonne: $5,686, slight rise

Iron Ore, tonne: $54.71, rising

Oil, Brent Crude barrel: $45.82 fall

Wheat, tonne: £146, steady

London Stock Exchange: FTSE 100: 7,472 (slight fall). FTSE Allshare: 4,087 (slight fall)

Briefly:

If you put your money in wheat and iron ore then you have had a good week – both moved significantly up, wheat on presumably the hot weather and the prospects for yields in this year’ harvest. Everything else, whether due to the heat or to investor nervousness, was pretty torpid. Apart that is, from oil – that had another bad week, with political events suggesting that the OPEC production agreements may fail.

 

If you enjoyed this article please share it using the buttons above.

Please click here if you would like a weekly email on publication of the ShawSheet

Issue 109:2017 06 15:Week in Brief Financial

15 June 2017

Week in Brief: BUSINESS AND THE CITY 

NEWS, the word in pink on a grey background

RIDING HIGH:   As the traditional demarcations in the motoring industry fall away, another crossover.  JLR, owned by Tata, the Indian conglomerate, which makes Land Rover and Jaguar cars in the UK, is investing a trial US$25m into Lyft, an American rival to Uber.  Market wisdom is that self driving will change the whole way we own and use cars, and that car sharing and rides for hire will increasingly take over from individual ownership of cars.  So cars will be another form of public transport, albeit one we can call up at will and direct to our individual needs.  Uber is seen as the precursor of a lot of changes just beginning now, and is admired among those leading the technology revolution in the motoring world for its innovative approach (although perhaps less so for its corporate style, following this week’s revelations that founder and CEO Travis Kalanick will temporarily step down as part of efforts to address internal behavioural issues).  Lyft, which is trading in the US in major cities, is hoping to be slightly upmarket of Uber (in its vehicles) and the tie up gives it capital for expansion but also a tie up with the luxury car maker which will enable it to use Jaguars and Land Rovers for its services.  Lyft also wants to trial driverless vehicles for its taxi services, another area JLR is working on, so the association and investment should be very beneficial for both parties.  JLR is the smallest of the upmarket luxury car brands and is seeking ways to accelerate its growth to become a major worldwide player.  It is not the only auto manufacturer investor into Lyft though – US giant General Motors and Chinese maker Alibaba are also shareholders, Lyft having rasied US$500m in a share issue in the spring.  That values the business at an impressive US$6.9bn and is enabling Lyft to make speedy progress in growth, including into specialist, mainly urban, niches such as specialist medical transport.  They hope to arrive in the UK soon and challenge Uber, with, no doubt, JLR vehicles.

SMALLER GUARDIANS:  The broadprint newspaper sector is shrinking further.   The Guardian has finally decided to go to a tabloid format.  At the moment it prints to its own size – smaller than a traditional broadsheet but bigger than tabloid, a size known as Berliner.  That means it has to have special presses as no other significant printing is done to that scale; the Guardian had to spend £80m building its own presses when it switched to that size some ten years ago.  Now as they approach renewal and the Guardian tries to find production economies to match its declining circulation and revenues, it has decided that it must outsource its printing – probably to Trinity Mirror group, a rival publisher with spare capacity.  That will save capital expenditure and also increase flexibility as to where the newspaper is printed – currently limited to those Berliner presses in London and Manchester.  This will increase pressure on the remaining broadprints – most notably, the Telegraph – to follow suit, both for economic reasons and for easier handling by the distributers.

GREEN REVERSAL:  We spoke a bit soon last week when we said that Philip Green’s retail chain whose flag ship is Top Shop  continued to outperform the troubled retail fashion market.  Figures released at the end of last week showing turnover and profits for the group were both down, by 7% for turnover and about 20% on profits.  The UK was the worst performer, offset by expansion in Europe and the USA, but even so total turnover was only just a touch over £2bn.  More worryingly for Green’s employees, the pension fund deficit in the group widened from £189m to £426m, although the Green contribution to the fund has been increased, following pressure from the Pensions Regulator, to £50m a year for the next three years.  The group blames uncertainty among UK consumers, and the growth of internet trading.

BACK TO THE DRAWING BOARD:  The internet’s power in fashion retail does not work for everybody though.  Conde Nast, the doyen of fashion magazine owners (Vogue, Vanity Fair, GQ, etc), has been pouring resources into its own on-line shopping portal, Style.com.  The idea was that magazine readers would see the temptations in the magazines and then be able to order their fancy on the website.  But is seems the average fashionista still likes the physical thrill of shopping, not just clicking, and the website has failed to make much impact at all.  Conde Nast is now throwing in the (no doubt very stylish) towel and selling what it can to the UK luxury fashion firm, Farfetch, who will relaunch the concept and offer linking services to Conde Nast to try and reinvigorate the wreckage.

NO MONEY FOR MONITISE:  And more troubles elsewhere in the technology based sector.  Monitise is a UK based business which made its name by developing software for the mobile payments sector, a key component of internet trading which needs instant but secure payment facilities to give service to on-line customers.  Initially – which means less than ten years ago in this fast moving sector – it was a major success, valued by 2014 at over £1bn, and its systems were used by most major British banks, and by international card processor, Visa, which owned 15% of the company.  But Visa then announced that it would develop its own payment systems and although Monitise developed improved and enhanced versions of its own, FinKit, it did not recover from this blow.  Now it has been sold for £70m to a US rival Fiserv, with whom it has been working on joint systems.  Monitise in spite of its rapid sales growth (and decline) never managed to make a significant profit and lost £243m in 2016, a sad end to a brave enterprise.

NO DELIVERY: Just to prove technology problem stories come in threes, J Sainsbury is also struggling with technology issues, in this case in its on-line delivery service.  This has suffered a number of glitches recently and then failed altogether earlier this week.  Although the supermarket chain very quickly got things running again, it lost many customers orders and prompted an online chorus of complaints and a dip in the share price.  This is embarrassing for the chain which is trying to build itself as the leader in on-line food retailing.  The problem seems to have stemmed from the new technology being introduced by Sainsbury, who are said to have large teams of IT specialists working on catapulting Sainsbury ahead of its competitors.  Not without customers getting their cheddar and tubs of Ben and Jerry’s they won’t.

SURPLUS ENERGY:  The oil price may be back in the doldrums, but oil products are still worth money to some.  Two men from Essex and one from Scotland have just been jailed for creating an intercept into an oil products pipeline where it crossed the Chevening estate in Kent and siphoning off some of what was passing through – red diesel for farm machinery on the day the police found the intrusion into the pipeline.  We should make clear that although Chevening House is the government grace and favour residence of three men – Boris Johnson, David Davies, and Liam Fox – they were not the three men jailed.

KEY MARKET INDICES:

(as at 13th June 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.30% (unchanged); 5 year 0.59% (fall).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.04% (steady)

US$: 1 mth 1.04% (steady); 3 mth 1.20% (steady); 5 year 1.82% (rising)

 

Currency Exchanges:

£/Euro: 1.13, £ weakening

£/$: 1.27, £ weakening

Euro/$: 1.12, € steady

 

Commodities:

Gold, oz: $1,269, modest fall

Aluminium, tonne: $1,876 slight fall

Copper, tonne:  $5,658, slight rise

Iron Ore, tonne:   $51.87, fall

Oil, Brent Crude barrel: $48.25 fall

Wheat, tonne: £141, steady

London Stock Exchange: FTSE 100: 7,527 (slight fall).  FTSE Allshare: 4,119 (slight rise)

Briefly:

Given political events last week, the markets remain surprisingly steady – oil and iron ore continue to fall but other commodities seem settled within tight trading patterns.  The UK stock markets did reverse last week but are now back more or less where they were. Sterling has fallen but interest rates also remain pretty steady.

 

If you enjoyed this article please share it using the buttons above.

Please click here if you would like a weekly email on publication of the ShawSheet

Issue 108:2017 06 08:Week in Brief Financial

8 June 2017

Week in Brief: BUSINESS AND THE CITYNEWS, the word in pink on a grey background

FASHIONING A NEW FUTURE:  These are difficult times for fashion retailers, especially those dealing with the mass market.  The old favourites are slowly slipping away – BHS, British Home Stores as was, the staple of many high streets for much of the second half of the twentieth century, has perhaps been the most high profile casualty of recent years.  It was sold (for £1) by Philip Green’s group of companies to a new owner.  That new ownership failed to make any impact on its ever diminishing customer support and lasted just over a year, the business sliding into bankruptcy, its pension scheme in major deficit, and its many store leases creating a problem for landlords who found themselves taking back premises that were of a size and presentation no longer attractive to potential new tenants.  But BHS had been a troubled case for many years – Green bought it as a bargain believing that he could turn it round and fashion (pardon the pun) a modern business out of it, as he had done with Top Shop, formerly Burton.  But, as we know, his magic did not work, and BHS is now a sad footnote to retailing history.

Green has made Top Shop a major success by that old Tesco policy of “piling it high and selling it cheap”.  His shops are by conventional measures over stocked and over crowded, creating an air of excitement among its teenies and twenties customer base, a sort of disco for cheap clothing, in which the prices are so low that the average customer will leave not with one item but with bags full – all bought so cheaply that they may well be worn once and thrown away.  Most stock is sourced from the Far East, made by fast manufacturing techniques, shipped in and put straight onto shopfloor racks, and then sold as fast to the customers.  It looks a simple model but requires close attention to trends and shifts in customer taste; a late spring or a pop idol wearing the wrong thing can mean jettisoning a lot of stock.  Top Shop has survived this; many of its rivals have not.  The rise and fall of hip fashion chains would make a book (in several volumes).  It would also be out of date before it even reached the shops…

Moving a little up market the customers may not be quite so fickle and (arguably) not so obsessed with what is in or out.  But trading conditions can be equally hard.  Marks and Spencer knows all about that, having spent more than twenty years in slow decline from being the nation’s favourite middle market clothes shop to become …a posh grocery store with a clothing shop tacked on.  Well, not quite, but almost; numerous chief executives have failed to find a way to keep fashion customers enthused; many drifted away to Next, and to smaller but smarter chains such as Jacques Vert and Jaeger.  But even they could not survive the treacherous shoals of shifting taste and price conscious shoppers.  Both Jaeger and Jacques Vert went into administration last month (and Store Twenty One, a Top Shop rival, is currently fighting off administration) .  All three are likely to survive, sold into new hopeful hands for nothing much, giving their shareholders a cold bath and enforcing discounts on their creditors and big rental concessions on their landlords.  Jacques Vert is rumoured to be going to three Asian investors who say most of the outlets will survive, which include concessions in several department store chains, as will 1,500 jobs (out of the current 1,900 employees).

But there is no evidence that conditions will get any easier.  Competition, including the increasing proportion of sales made on‑line, and ever more fickle customer tastes will continue to produce turmoil in retailing, which, like the clothes it sells, looks ever more like a throwaway business.

SHOPPERS TUCK IN:  The Brits still lead the world in at least one thing – food shopping.  Not only do we have one of the most competitive food supermarket arenas with at least eight national chains fighting for market share – ranging from the enormous (Tesco) to the quality (Waitrose) to the discounters (Aldi), nearly all of which are still expanding their network of shops and stores, we also have the biggest proportion of groceries bought on‑line. Recent data from Kantar Worldpanel which monitors spending in the grocery industry, says that we shop more frequently on‑line (15 times per year) and spend more – £65 a go – than any in other country when we do.  In fact our average spend is higher than our average supermarket spend – though that reflects the large number of quick purchases, a trend which is increasing as we pop into our local mini supermarket for a quick ready meal or casual item.

BUILDERS TUCK IN: After a wobble in late 2015 and in 2016, construction activity in the UK is increasing again.  This reflects more housing starts as residential buyers seem to have recovered confidence after the 2105 election and the 2016 Referendum (although it remains to be seen what effect the 2017 election will have) but also in the commercial sector.  London office construction has slowed, reflecting a market where demand and supply seems to be more finely balanced, but new starts in the regions, especially in regional cities such as Manchester and Birmingham, are increasing; and shopping centre owners seem to be increasing spending on refurbishment and extensions.  Indeed, such is the pace of recovery that builders are starting to see signs of bottlenecks in supply and a shortage of skilled workers – caused by the return of a number of skilled eastern European  immigrants to their home countries, reflecting growing economies there and Brexit related concerns here.

BANKERS TUCK IN:  The residential buy‑to‑let sector may be going into reverse as the changes in tax treatment of external debt make the economics less attractive to private owners, but some banks are still happy that the sector makes an attractive and low risk lending business.  Metro Bank, one of the most successful challenger banks, has just bought a large mortgage loan book from Cerberus, a US investment firm, which has in the past been a buyer of such books.  The book is of a face value of £597m, which will increase Metro Bank’s residential mortgage loan book to about £4.5bn.   Over 92% of the book being bought is in buy‑to‑let mortgages.

FASHIONING A DIFFERENT FUTURE:  Christopher Bailey, brought into Burberry in 2013 to turn around the faltering fashion business, but on a reward structure which has proved very controversial, recently announced he would give up the Chief Executive’s chair – to become Chief Designer.  It is an unusual step but one that Mr Bailey said reflected his ambitions and his core talents.  His move of offices will be softened by the vesting of the loyalty share bonus he received when he joined, which becomes his next month – and will give Mr Bailey shares worth around £10m.  As the share price has risen a third in the last 18 months, shareholders may feel that his tenure has been worth it.

KEY MARKET INDICES:

(as at 6th June 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.30% (unchanged); 5 year 0.66% (slight rise).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.05% (steady)

US$: 1 mth 1.04% (steady); 3 mth 1.20% (steady); 5 year 1.77% (falling)

 

Currency Exchanges:

£/Euro: 1.15, £ steady

£/$: 1.29, £ steady

Euro/$: 1.12, € steady

 

Commodities:

Gold, oz: $1,293, modest rise

Aluminium, tonne: $1,892, slight fall

Copper, tonne:  $5,540, slight fall

Iron Ore, tonne:   $54.49, fall

Oil, Brent Crude barrel: $49.85 fall

Wheat, tonne: £141 fall

London Stock Exchange: FTSE 100: 7,540 (slight rise).  FTSE Allshare: 4,116 (slight fall)

Briefly:

Our commodities basket seems to have ceased its slow upward movement and eased into a reverse, with further steep falls in iron ore, and with oil going below the US$50 level for the first time for several months.  No sign of election jitters in the UK stock market – the FTSE100 was up, though the Allshare was slightly down.

 

If you enjoyed this article please share it using the buttons above.

Please click here if you would like a weekly email on publication of the ShawSheet