Issue 101:2017 04 20:Week in Brief Financial

20 April 2017

Week in Brief:BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

GOLD SORES:  You know that the problems are real when Goldman Sachs misses its own performance forecasts; especially when they and fellow investment banks have been making positive noises, albeit unofficial, about the beneficial effects on their businesses of political change in the USA and Britain . Goldman’s first quarter this year was expected to show the investment banking giant powering on, but in fact the performance was flat – good results in mortgage and interest instrument trading were cancelled out by underperformance in commodity trading, credit related businesses, and currency trading.  The core reason seems to have been that Goldman expected interest rates to start rising under the new President and positioned their book accordingly – buying early in the expectation rates would be on the up. Initially that looked like a good call but then rates have fallen back, leaving the trading books showing losses at mark to market.  Once upon a time of course banks could re-mark their books as longer term holds and avoid mark downs, but no longer, books must be valued as if being sold at the valuation date.  But do not despair too much for the struggling bankers – in spite of the weak quarter, net revenues were up 27% against the comparative quarter last year, with especially strong performance in areas which are added value – advisory based activities, such as underwriting debt or equity raises or investment management.

The news has knocked Goldman’s already retreating share price, down 5% since the November election, and also knocked the share price of some competitors who it is thought in the market may be experiencing similar issues – without the cushion of Goldman’s strong position in added value products.

IRON AGE:  One commodity price we do not follow in our weekly round-up of market trends is that of iron ore, a basic but highly essential raw material of many industrial (and domestic) products.  Iron ore is a bit like oil – for a long time the world looked as though world reserves were running out whilst use kept going up, but then the rising price made exploration more interesting and massive new reserves were found.  Just as, needless to say, the world started to be much more efficient at using metal so demand, whilst not dropping, slowed.  And unlike oil, iron can be reused, over and over again – as the scale of the world’s scrappage business demonstrates.  It is true that Europe is pretty much mined out, the big suppliers now being in Australia, India, and Brazil – and the big users in India and China, and to a declining extent, the West.  Ore prices have also been behaving like oil recently, recovering to highs of over US$95 per tonne at the beginning of the year as demand seemed to be picking up among steel manufacturers, but now sliding back to around $65 as steel production reaches new records – but world demand for the stuff slows.  The ore industry knows what will happen next and the price reflects sharp concerns that both iron ore and steel are being stockpiled – indeed ore reserves ready for processing are said to be up about a third in the first three months of 2017.  The slow up in demand is now starting to affect mines which are easing up on production; an especial problem for Brazil where mining is a big (and relatively well paid) employer, it is also hitting the share prices of the big public mining companies most of which are also suffering from the slide in copper prices over the last few months.

LOOSE RIGGING:  The LIBOR rigging scandal just will not go away.  After a series of trials of individual traders accused of attempting to adjust the market rates for interest rate products, for their own benefit or that of mates, which produced a few convictions but also a lot of acquittals, further suggestions have been made that the real impetus came from higher up.  Recently revealed evidence suggests that this reached as high as the Court of the Bank of England, and linked in the Treasury, which is said to have wanted interest rates pushed down as low as possible to help in the crisis of 2008 – but it goes back  further than that.  The allegations have now been picked up by John McDonnell, Labour’s shadow Chancellor of the Exchequer and a close ally of Jeremy Corbyn, who has called for a public enquiry into exactly what went on and who knew what.  Given other distractions for politicians this week and into June, it seems unlikely the government will oblige him, but there may be more revelations to come about the relationships between the Bank, the regulators, and the clearing banks.

NOT GOOD ENOUGH: The legacy of 2008 still hangs over one major bank.  RBS was supposed to sell its recently carved out Williams and Glynn’s subsidiary (a loose successor to the bank of that heritage which was centred in the North West).  After years of trying to separate it off – complex reporting and management systems seemed to make that almost impossible – it was finally able to persuade the Treasury and is currently urging European Commission competition regulators to be allowed to keep it, provided that it injects about £750m into rather vaguely described initiatives to increase competition in the small business market.  RBS’s small competitors – the so-called “challenger banks”, do not like that at all, calling for the government to force RBS to divest itself of a range of assets into the market so that the RBS business can be shrunk and the challengers be given more of a leg up to become competitive.  They also want RBS to be forced to continue to provide basic services at cost so they do not have a one stop advantage over smaller banks that do not have capabilities in, say, foreign exchange or derivative provision.  The UK Treasury has said the RBS proposal is the best way ahead – but it is far from certain that the EC will take that view.

HEAVY BOOZERS: Good news for those facing the uncertainties and upsets of a General Election campaign – in 2016 45 new gin distilleries were opened, giving all the benefits of diversity and competition to a market which is so close to so many hearts.  Or livers.  For the first time gin sales exceeded £1billion, and HM Revenue and Customs, who has awarded itself the not unpleasant job of monitoring the sector says that British gin is exported to 139 counties.  Many of the new batch are artisan distilleries, capable of being run from a big garden shed or even a couple of back bedrooms.   A lovely way to sooth yourself to sleep.

KEY MARKET INDICES:

(as at 18th April 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (steady); 5 year 0.64% (falling).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year -0.01% (falling)

US$: 1 mth 0.99% (steady); 3 mth 1.15% (steady); 5 year 1.83% (falling)

Currency Exchanges:

£/Euro: 1.18, £ rising

£/$: 1.26, £ rising

Euro/$: 1.06, € steady

Gold, oz: $1,285, rising

Aluminium, tonne: $1,915, falling

Copper, tonne:  $5,620, falling

Oil, Brent Crude barrel: $55, rising

Wheat, tonne: £147, steady

London Stock Exchange: FTSE 100: 7,123 (fall).  FTSE Allshare: 3.9204 (slight fall)

Briefly:    Mrs May’s election announcement seems to have affected many things – even in international commodity markets.  That traditional shelter, gold, rose; the traditional index of nervousness, oil, also rose; and everything else fell.  On the financials front, though there was very little movement – sterling was slightly up and most longer term interest rates fell.  Or maybe it is just that everybody is away for Easter?

 

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 100:2017 04 13:Week in Brief Financial

13 April 2017

Week in Brief:BUSINESS AND THE CITY

Headline image saying £NEWS

TRY AGAIN:  The troubles of leading house builder Bovis may be coming to an end with the help of fellow residential builder Galliford Try – but not quite in the way that Bovis had in mind.  Bovis found both house sales and its share price in a downward spin last year after revelations that the company had been hustling customers to accept houses that were not quite finished, so as to book sales early, so advancing profits and, allegedly, senior management bonuses.   The chorus of complaints from new home owners and the concerns of shareholders led to the departure of the chief executive and a decision by the board to pursue a merger – the chosen mergee being Galliford Try.  But GT has now decided that this is not a deal, for reasons that are not entirely clear but may have something to do with the costs of integration and Bovis’s low margins compared with rivals in the industry.  So Bovis now is trying a different route.  It has taken on Galliford Try’s former chief executive, Greg Fitzgerald, as its new CEO.  Mr Fitzgerald has a very good reputation among house builders, having built up two small residential developers in the Home Counties, sold them and himself to GT, and then worked there for thirty years, the last ten as chief executive, building the firm up to become a major player in the industry.  He has agreed a three year deal at Bovis with most of his remuneration by bonus, but payable only in shares, to align his performance with returns to shareholders.  He has a big job to do in restoring confidence, cutting costs, and rebuilding the Bovis brand name, but most observers think that will be a challenge that he will meet.

POWERING ON – OR OFF:  We wrote in the Shaw Sheet last week about the sources of electrical supply now available and how perceptions of oil shortages and pressure on supply are misconceived.  As if to prove our point, the National Grid has now reported  that it expects problems with the supply of power this summer – Britain is likely to have too much of it.  As more and more capacity comes on line, especially from sustainable sources, the demand for power in the summer is actually falling and is predicted this year to be about 5% down on last.  This is mostly because of us users getting more and more efficient in how we use our electrical kit, those solar panels on the back roof making quite a contribution, and not least because the increases in prices coming through will enable suppliers to pay the green costs placed on them by government to encourage a move to sustainable carbon neutral production.  That is working well – especially in promoting solar panels which, of course, are at their most productive in the summer.  But National Grid has to manage forward supply, partly so that surges do not occur, damaging sensitive electrical equipment, but also so that production is not wasted – or fall short, as the Grid still has to pay for contracted power whether it gets used or not.  Last year the Grid was paying incentives to some industrial users to use more power at times of low demand – just as it sometimes pays during winter peaks to not use electricity.  Now they are looking at paying some wind farms and solar producers to not produce this summer.  Unfortunately for householders with panels on the roof or a turbine on the chimney, this offer will not apply to them.

NOT JUST SOFT SOAP: Unilever has shown its critics and grumbling shareholders that at least one of their recent criticisms was misplaced – exhibiting a remarkable fleetness of foot in putting up a series of proposals for moving the business on after repulsing the failed takeover bid from Kraft Heinz.  It has proposed a sale of its margarine and fats unit, and also an internal merger of its two food divisions, which should in fairly short time raise operating margins to around 20%, reducing the capital requirement of the business and enabling dividends to be improved.  The first sign of this will be a €5bn special dividend to be paid to shareholders in the next few months.  The strategic review has been completed in a month, but the reaction of the market was that this was a collection of sensible suggestions that addressed concerns about the business and would improve returns whilst strengthening the trading of the business by enabling concentration on core brands.

GIVE A LITTLE WHISTLE: In the UK and the US, the Financial Conduct Authority, the Prudential Regulation Authority, the Department of Justice and New York Department of Financial Services have all said that they will investigate the conduct of Barclay’s CEO Jes Staley and his efforts to discover the identity of the writer of a whistleblowing letter. Mr Staley has said that he was trying to protect a colleague and has apologised for his actions.  Whistleblowing is an important weapon in fighting corruption, but the process can only work if the whistleblower is confident that he will remain anonymous.  In this case the whistleblower has remained anonymous, but there will be concerns that the story will discourage others from coming forward.  Mr Staley will have his pay award adjusted by as much as £1.3m by Barclay’s as a result of his conduct.

OILING THE WHEELS: Having previously said that it only paid money to the Nigerian government, Shell has now admitted that it dealt with a convicted money-launderer when negotiating access to an oil field in Nigeria.  Shell and the Italian company ENI paid the Nigerian government $1.3 billion, of which it is claimed $1.1 billion was passed on to a firm called Malabu, controlled by Dan Etete, a man later convicted of money-laundering in a separate case.  Shell has said that they believe the settlement was a fully legal transaction.

KEY MARKET INDICES:

(as at 12th April 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (steady); 5 year 0.69% (falling).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.20% (rising)

US$: 1 mth 0.98% (steady); 3 mth 1.15% (steady); 5 year 1.96% (falling)

Currency Exchanges:

£/Euro: 1.18, £ rising

£/$: 1.25, £ stable

Euro/$: 1.06, € stable

Gold, oz: $1,275, rising

Aluminium, tonne: $1,907, falling

Copper, tonne:  $5,745, falling

Oil, Brent Crude barrel: $56, rising

Wheat, tonne: £148, stable

London Stock Exchange: FTSE 100: 7,349 (rising).  FTSE Allshare: 4018 (rising)

Briefly:    Very steady week in most areas – with signs of the Easter break beginning early.  Gold continues to push gently upwards – a long term trend seems to be emerging there .  As always oil provides the main action – a push back up from the weakness of a couple of weeks ago seems likely to reverse as more benign conditions in Libya mean that supplies of crude from that market are increasing rapidly.

 

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

Issue99:2017 04 03: Week in Brief financial

06 April 2017

Week In Brief: BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

BRAKES ON AT CARR’S: Carr’s is an unusual conglomerate, combining a traditional but sizeable business of selling agricultural supplies in the UK, New Zealand, and the USA, with a technical engineering business which is strong in nuclear.  The idea is that they are sufficiently diverse to make it likely that troubles in one area will be offset by good performance in the other.  Not this year; although Carr’s forecast last autumn that profits would improve in the current trading period, in the event performance has swerved from the expected path after problems in both areas late in 2016.  In the agricultural division, problems in the dairy based business arose from a reduction in demand coupled with pressure on Carr’s costs as oil prices recovered; whilst in the engineering part of the business several expected contracts did not materialise, mainly because of the well-publicised problems in finalising the Hinckley Point scheme.  Problems in the USA agricultural world mean that no upturn there is likely for the next couple of years, but in the UK the prognosis is a bit better. The UK dairy industry is also picking up, leading to hopes for early margin improvements there, as is also the case in New Zealand.  On the engineering side, Carr’s did win a contract in connection with work at Sellafield in North West England, and it says other nuclear work is going well; with the longer term outlook good.  Nevertheless, analysts say indications are that profits will be 20% down on forecasts made late last year, with a recovery in 2018.

SHRINKING SCOTT:  We have followed in these pages the continuing difficulties of the Guardian newspaper, which has for some time being unable to match its income to its outgoings. The reason that this has not caused to a crisis much earlier is the support of the Scott Trust, set up by the founding family many years ago, which is cash rich from sales of other publishing assets.  But the cash mountain has gradually shrunk and the board of the newspaper, having valiantly hoped that by keeping on a full journalistic staff and free reader access to the Guardian website, readership and revenue might recover, have finally decided they have to take action to reduce costs.   This follows an appeal last year for voluntary redundancies which apparently was fully subscribed, but there is now to be a series of compulsory job losses.  The management of the paper says that departments will be given cost reduction targets, overall equating to around 20% of the present cost base, and asked to submit proposals to achieve them; this will involve job reductions in all area, but it is thought likely to fall especially heavily on the editorial area which, still employing over 700 journalists, is believed to be by far the largest newsroom in any UK newspaper.  It employs about half the total staff.  Two hundred and fifty jobs went last time, though the number of posts now threatened is thought to be about half that.  The board want to get the group to a breakeven point by early 2019.  One further job loss may be current chief executive David Pemsel – he is rumoured to be a potential front runner to take over as chief executive of Channel 4 Group.

STICHING IT TOGETHER:  In a move which has engendered considerably less publicity than another pension matter which he has been involved in,  Philip Green has agreed to increase the contributions of his family holding company, Arcadia Group, to the pension deficits of the fashion retail businesses which it controls.  The best known of these is Topshop, but it includes various other high street brand names, where the pension funds have funding deficits along the same lines (but not so significant) as the BHS group, which was sold and then collapsed into administration a year ago.  The Green family resisted making up the deficit in the BHS scheme but has now agreed to put £363m into the scheme, which is estimated to be about 60% of the current shortfall.  Arcadia Group has now agreed to more than double the contributions into its pension scheme – though only from mid 2019 – to try and clear a deficit estimated at £565m.  It estimates that the deficit will be cleared by 2026.  This is now awaiting approval by the pensions regulator and Pensions Protection Fund, but they are thought likely to agree.

ANY STORM IN A PORT:  Not if the international cruising operator Global Ports Holding has anything to do with it.  It is believed to be sailing to a listing on the London Stock Exchange later this year and is busy strengthening its board of directors to go with its new status.  The London listing – the company is already listed on the Istanbul exchange – should raise about £700m, some of which will go to reduce debt and the rest to expand the group’s activities.  The group has developed the specialist business of servicing cruise liners in dedicated areas in ports, initially in Turkey where it began but it is now expanding across Europe and the eastern cruising circuit.  It has created a market which was not really known to exist – that of creating dedicated and secure high quality facilities for ship boarding passengers and the servicing of their ships, and has benefitted from the rapid expansion of this part of the tourism business.  Latest director to clamber on board is none other than Peter, Lord Mandelson, who, Global Ports says, will bring many important international connections to its business through political and commercial links from his time as EU Trade Commissioner.  Also going up the gangplank will be Thierry Deau, who founded and ran Meridiam, the major French asset manager.

CUTTING THE MUSTARD:  Reckitt Benckiser, formerly Reckitt and Coleman, is said to be preparing to sell one of its core brands – French’s Mustard, not to be confused with French mustard of course; this is the sizzler you squirt on your hot dog.  Reckitt bought French’s in 1926 when it was building world leadership in mustard; Colman’s went in 1994 and is now part of Unilever, and Reckitt has increasingly refocused as a specialist in health and hygiene products, recently buying Mead Johnson, the baby product specialist.  Increasingly it feels French’s, of which it sold 160 million bottles last year, has no natural place in the group, and thinks it might do better in new ownership.   Oddly though it has no plans to get rid of its ketchup division or its other famous American countertop brand, Frank’s Red Hot sauces.

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

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (steady); 5 year 0.69% (falling).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.20% (rising)

US$: 1 mth 0.98% (steady); 3 mth 1.15% (steady); 5 year 1.96% (falling)

Currency Exchanges:

£/Euro: 1.17, £ rising

£/$: 1.24, £ falling

Euro/$: 1.06, € falling

Gold, oz: $1,257, rising

Aluminium, tonne: $1,948, rising

Copper, tonne: $5,816, slight rise

Oil, Brent Crude barrel: $53, rising

Wheat, tonne: £147, falling

London Stock Exchange: FTSE 100: 7,309 (slight fall). FTSE Allshare: 3.984 (slight fall)

Briefly: Very steady week in most areas – with signs of the Easter break beginning early.  Gold continues to push gently upwards – a long term trend there seems to be emerging.  As always oil provides the main action – a push back up from the weakness of a couple of weeks ago seems likely to reverse in the next few days as more benign conditions in Libya means that supplies of crude from that market are increasing rapidly.

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

Issue98:2017 03 30:Week in Brief Financial

30 March 2017

Week In Brief: BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

NOTHING HELPS:  When it was first announced, the proposed Tesco purchase of Booker was hailed as the final mark of the supermarket giant’s recovery from the accounting scandal and poor performance which have damaged its reputation over the previous four years and seemed to confirm that new chief executive Dave Lewis had truly started a new era.  Booker was a good fit with Tesco – if you take out some of the competition in the small “mini-market” business which is increasingly over-provided and where rationalisation of the Budgen and Tesco Metro chains would bring direct costs savings but give Tesco access to Booker’s core business of supplying the wholesale catering business where it is a market leader and enjoys rapid growth.  Most analysts praised the logic of the deal and the deal making skills of Mr Lewis and his team.  Until now, that is.  There seems to have a been a change of sentiment especially amongst some Tesco shareholders who are canvassing support for the deal to be cancelled, mainly on the grounds that Tesco is paying too much.  Also of concern is that the regulators concerned about competition in the retail food market (Tesco alone has over 21% of the market) will force the sale of more local stores than would be good for the supermarket chain.   Mr Lewis’s views in response have not been shared but Tesco has now issued a formal statement in response to the remarks and the rumours of shareholders combining to possibly try to stop the deal.  They say that the transaction remains on course and is good value for the group.

Some analysts say that for all Mr Lewis’s success in turning the Tesco business around and back to profitability, he has not been great at managing his main shareholders; several large institutions are significant holders including Schroders and Artisan Partners who hold 9% and have asked the board to withdraw, citing nervousness about renewed expansion so soon in the recovery programme.  A little more pre-discussion might help next time.

LIKE A HURRICANE:  The oil price slowly slides back from its recent circa  peaks of circa US$60.  It is now trading just above $50 with more pressure on future price trends.  In the USA Mr Trump is likely to dismantle at least some green energy measures which will enable coal and shale oil and gas to step up profitable production, and even in the UK, new oil reserves are being found offshore.  The latest is to the west of the Shetland Islands and has been discovered by Hurricane Energy which has been prospecting in this area for some time and believes it has discovered a major field.  Although it has long been suspected that there is oil under the Atlantic coast here, the practical difficulty was always how it could actually be extracted from such deep and stormy waters.  The ocean has not become any less difficult or forbidding, but the technology of extraction has much improved, so that platforms and drills are more robust and maintaining them easier.  And cheaper – at $50, such reserves can be extracted profitably – which is also the case for shale oil.  The thinking behinds OPEC’s attempts to restrict output from its members is that offshore reserves and shale need a breakeven price of $70/75 to work – but improvements in drilling have pushed that cost right down.  $50 seems to be the mark now and that could well mean that it is about what we will be paying for the basic barrel for the foreseeable future.  Most OPEC members can produce very profitably at that level of course, but as we have explored before, many OPEC members have got used to very high oil revenues and cannot meet their ongoing obligations without more of it.  They may have to learn…

BLOWN AWAY:  One of Britain’s great success stories in combining need and technology to produce profits is Dyson, founded by Sir James Dyson, who began by producing an improved vacuum cleaner, and is now a major producer of many products which move air – hand driers, humidifiers, heaters and so forth.  The products are well designed and well-engineered – and sell at a major premium to the competition; such is the benefit of brand reputation.  Dyson has kept much of its research and product development in its base in Wiltshire, but increasingly makes most of its products in the Far East, largely in Malaysia.  It has also recently opened a new plant and research facility in Singapore.  That increasingly looks like a clever move – Dyson saw profits rise 41% last year and most of that is from sales in the Far East, both to increasingly wealthy households in China and those in the rising nations ringing the South China Sea.  As Dyson is a private company it does not publish actual profits, but it did say that turnover was up 45% to £2.5bn, and that gross earnings were £630m – a remarkable margin in competitive products.  Half that comes from vacuum cleaners, but the growth now is in the company’s other products, where it is increasingly selling to business – hand dryers for company wash rooms for example.  The USA remains Dyson’s biggest market, with the UK second, but China is now fourth and India is starting to figure on the company radar – and that is where Dyson sees the next big area of growth.   India is not an easy market for overseas makers to break into, with high tariff and ownership barriers, but Dyson’s strategy is to start manufacturing there before long, and possibly form a partnership with a local company to help them sell and build.

FROM AIR TO WATER:  A warning to Dyson – what was once a similar much praised British success story, now struggling to regain momentum, is changing its name.  Wolseley was a leading brand of plumbing suppliers with a network of outlets across the UK and a great reputation for quality and price.  After twenty five years of unbroken profit growth things went very wrong – starting from that common problem, a US acquisition which very quickly started draining money out of the business – just as a downturn hit the UK building market.  The American business eventually got turned round but the UK end has never really got back to where it was.  The company has just announced that the improvement in profits seen last year has been sustained into the first half of this, showing £515m, and to consolidate on that recovery Wolseley will become “Ferguson”, the name of the American business.  That will emphasise where it performs best – the Nordic business will be sold and the UK business will see further cuts – the best growth message for the present time will continue to be the USA.

KEY MARKET INDICES:  (as at 28th March 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (slight fall); 5 year 0.80% (rising).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.13% (falling)

US$: 1 mth 0.98% (rising); 3 mth 1.15% (rising); 5 year 2.00% (falling)

Currency Exchanges:

£/Euro: 1.16, £ rising

£/$: 1.26, £ rising

Euro/$: 1.08, € rising

Gold, oz: $1,243, rising

Aluminium, tonne: $1,918, slight rise

Copper, tonne: $5,774, slight fall

Oil, Brent Crude barrel: $51.8, steady

Wheat, tonne: £148, rising

London Stock Exchange: FTSE 100: 7,343 (slight fall). FTSE Allshare: 3.997 (slight fall)

Briefly: Dollar short term interest rates continue to edge upwards, though for the first time for a while the movement up in long rates has reversed – this could well be a response to what is increasingly forecast as the economic consequences of Mr Trump, an early boom followed by a slowdown.  The rest of the market continues pretty steady – with oil still keeping above the $50 mark and wheat shifting upwards again.

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 97:2017 03 23: Week in Brief Financial

23 March 2017

Week in Brief: Business and the City

NEWS, the word in pink on a grey background

WITHOUT A PADDLE: Thames Water have been fined £20 million for pumping almost one and a half billion litres of untreated sewage into the River Thames in 2013 and 2014, killing birds, fish and dragonflies and polluting the river, normally an attractive feature of Henley and Marlow, with nappies and other debris.  As five different installations were involved in the leaks, the judge concluded that top management must have been aware of what was going on.  The company has apologised.  Thank goodness it didn’t happen in the regatta season!

WALL STREET: Some put the fall in Wall Street this week down to doubts as to whether the new US administration will be able to deliver on promised tax cuts. Others, however, are concerned that US stocks are overvalued with the S&P 500 trading at 18.5% times expected profits.  Recent polling also suggest that investors are underweight in UK stocks, with a reduced level of new equity investment.

A MATTER OF TIMING: Conventionally, figures showing that inflation is now running at above 2% might be expected to mean that recent falls in interest rates must soon begin to reverse. For the moment however the Bank may seek to “look through” the recent inflation figures on the basis that longer projections show a return to 2% level, but there must be a limit to how long that policy can last, particularly in view of the recent increase in US interest rates by ¼%.  Interest rates are going to go up sooner or later and we would all prefer that the process was smooth and gradual. There are obvious risks in leaving it too long. (See moving the interest rate goal posts)

TAXATION OF DIVIDENDS: By how much should you reduce tax on dividends received by shareholders to take account of the fact that the profits distributed have already born corporation tax within the company?  That question has bedevilled the UK’s tax system for many years.  Before the European Court of Justice declared it illegal, we used to have an imputation system. That meant that a dividend paid by a UK company was accompanied by a tax credit, redeemable in cash by the recipient to the extent that it could not be set against his or her tax bill. This allowed all shareholders, including non-taxpayers such as pension funds, to get a rebate for some of the tax which had been paid on the underlying profits.

That all went wrong when the ECJ forbade of the charging of advance corporation tax, which safeguarded the Exchequer by ensuring that the tax paid by the company was at least equal to the tax credits given.  So the tax credit ceased to be something that could be cashed in and became an element in the computation of tax on the dividend.  That hit non taxpayers such as pension funds who now received no compensation for the tax paid on the company profits.  Individual taxpayers, however, benefitted from the tax reduction and, until last year, the combined effect of the tax credits and special dividend rates produced a charge of 0% for the basic rate (ie 20%)taxpayer, 25% for the upper rate (ie 40%) taxpayer and 30.6% for the additional rate (ie 45%) taxpayer.  Now, following the abolition of tax credits and ignoring the £2000 tax free dividend allowance as trivial, the rates will be 7.5%, 32.5% and 38.1%.  Those who work by reference to net income will be rebalancing their portfolios but the fact that the markets are dominated by institutions who will be unaffected by the change means that it will probably not affect prices.

KEY MARKET INDICES: (as at 22 March; comments refer to changes since last issue; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (slight fall);

Euro€: 1 mth 0.39% (rise); 3 mth 0.36% (rise);

US$: 1 mth 0.98% (rise); 3 mth 1.16% (rise);

Currency Exchanges:

£/Euro: 1.15, £ rise

£/$: 1.25, £ rise

Euro/$: 1.08, € rise

Gold, oz: $1,241, rise

Copper, tonne: $5,766, rise

Oil, Brent Crude barrel: $50.4, fall

Wheat, tonne: £144, fall

London Stock Exchange: FTSE 100: 7,327 (fall). FTSE Allshare: 3,984 (fall)

 

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 96: 2017 03 16: Week in Brief, Financial

16 March 2017

Week In Brief: BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

ALL CHANGE:  Rather more change than expected at HSBC which has been engaged in a search for a new chairman to replace seven year serving Douglas Flint – who was finance director before that.  HSBC almost always has promoted its top men (they all have been, so far) from internal candidates, a tradition which it defended as key to the tight corporate culture which drives the bank’s shared values and crisp internal communication.  But the banking group has decided that that need not be set in stone. The new Chairman will be Mark Tucker, not a HSBC man, not even a banker, (though he did two years as finance director at HBOS pre-recession), a tough taciturn South African who has had remarkable success in running insurance companies.  The bank has taken considerable trouble and time to get the right man in the chair, recognising there is a lot to do to get the bank moving again.  Tucker is said to have both the skills and the personal attributes to fit in – HSBC traditionally likes its leaders and seniors direct and brisk.  His first task is to find a new chief executive – the present one, Stuart Gulliver has confirmed that he will be leaving next year, as planned, though there were rumours that he might stay on a bit longer.  The new CEO may also be recruited from outside – there are not as many internal candidates as the bank might like, and there are a few very strong external candidates available, led by Antonio Horta-Osorio, currently doing the job with notable success at Lloyds Banking Group, but who is said to want fresh fields and a new challenge.

Whoever gets the job is going to have to work with Mr Tucker on a tottering in-tray of issues; HSBC has rather lost its way since the days when it was a world beater.  Excursions into the USA proved badly timed and very expensive and are not resolved yet with a settlement over mis-selling to sort out; expansion in Europe was probably a long term strategic error which is now being slowly reversed as the bank increasingly concentrates on the Far East where it is pre-eminent and on India and the Middle East; service issues in retail continue to cause trouble and expense – as does the investment to solve those problems; and not surprisingly return on capital remains poor.  Mr Tucker is said to enjoy a challenge and this will certainly be a big one, although his timing may also be good as Mr Gulliver has done much of the ground work to move the HSBC tanker onto its new course; even so Tucker will need a very strong chief executive to keep things moving.

BUILDING BIGGER:  The battle for Bovis is slowly warming up.  Once one of the high-fliers of the UK housing building industry, the group’s reputation was greatly damaged by a scandal in 2016 when it was revealed that customers had been pressurised into completing purchases of houses where the building works were not finished – mainly, it appeared, so that the group could meet demanding financial targets.  That led to a raft of damaging and expensive complaints, much consequential reputational damage, and a 30% drop in the share price, followed by the resignation of chief executive David Ritchie.  It also put the quoted company into play, as leading housebuilders looked to consolidate the market and get ownership of Bovis’s land-bank and land options.  Bovis is thought to have ownership of about 19,000 house plots, worth perhaps a £1billion, with a current market valuation for the whole group of around £1.1billion, so the work in-progress and market reputation – even damaged – is coming in at very little.  But there is some nervousness about the sustainable value of those plots – about three years supply to Bovis as it stands – because of the holding costs, some planning gain payments which will be triggered when work begins on some sites, and government threats to landholders who own consented plots and do not build them out fast enough. They may find their planning revoked or be forced to sell the plots.

Redrow were first to make an offer, valuing Bovis at around £1.14bn, rejected as not enough by Bovis’s management, as was a subsequent offer of £1.19bn from Galliford Try, a group which has grown fast over the last few years and is a similar size to Bovis.  Both Redrow and Galliford are especially keen to expand in  the south east of England. They are respectively focussed on the Midland and North-West and Midlands and South-West, so Bovis would be strategically a perfect fit for either of them.  Although Bovis has rejected the Galliford offer as not reflecting the full value of the Bovis business, it has said that it is not opposed to a takeover but wants to get the right price for its shareholders, and remains in discussions with Galliford.

IMPORTING JOBS:  Vodafone is the latest UK company to announce that it is returning a raft of call-centre jobs to the UK, from South Africa in this instance.  Vodafone has suffered from high volumes of complaints about its service quality and response, and in attempting to address those issues has decided that it helps to have a greater concentration of staff nearer customers.  2,100 jobs will be created in the UK by the move, mostly by expanding existing call centres across the UK, with the largest beneficiary geographically being Manchester.  Vodafone are far from the only telecoms company doing this – EE and British Telecom (now owner of EE) are also running down their overseas support networks and replacing them with UK domiciled services.  Quality is not the only issue – indeed may not be the real issue – wages and operating costs in traditional overseas call centre locations such as India and Malaysia have increased rapidly as those economies grow, and the economics of operating offshore are nowhere like so appealing as they once were.

SHOPPING PROBLEMS:  It’s not just City bonuses that are being cut; John Lewis Waitrose, the English middle class’s favourite department store and supermarket chain, is once again, for the fourth year running, cutting its staff annual bonus.  For 2016 it will be 6% – it was more than double that at 15% in 2012 – although group profits for the year were 21% up at £370m (on sales of £11.3bn). What is perhaps unusual in this is that John Lewis is a partnership in which all its staff are partners, so the bonus decision has to be “sold” to them as owners. The reasons for the continuing cuts are not hard to find – wage inflation, especially the costs of the minimum wage but also rising social costs – healthcare and pensions – are pushing earnings and rewards up for the less well paid but stressing the cost base, whilst John Lewis and Waitrose are engaged in long term upgrading of many of their stores to keep customer loyalty, protect against potential competitors, and keep the retail estate in best order in case of economic turmoil over the next few years. Waitrose in particular has been on the expansion path and the group wants to make sure finances are kept tight whilst those investments start up and begin to contribute.  However, Sir Charlie Mayfield, the chairman, did flag that whilst staff were very understanding of the need to conserve cash, the board were looking to circumstances in which they would be able to start to build the bonus back up.

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

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.35% (slight fall); 5 year 0.78% (rising).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.18% (rising)

US$: 1 mth 0.89% (rising); 3 mth 1.12% (rising); 5 year 2.19% (rising)

Currency Exchanges:

£/Euro: 1.14, £ falling

£/$: 1.21, £ falling

Euro/$: 1.06, € steady

Gold, oz: $1,206, falling

Aluminium, tonne: $1,881, slight rise

Copper, tonne: $5,793, slight fall

Oil, Brent Crude barrel: $51, falling

Wheat, tonne: £146, steady

London Stock Exchange: FTSE 100: 7,360 (slight fall). FTSE Allshare: 4,003 (slight fall)

Briefly: Interest rates seem to be on the move upwards; especially in the longer maturities; the dollar in particular continues to lead other currencies in this respect. The LSE continued to rise, with the Allshare breaking the 4,000 barrier; oil did the reverse with an unexpected decline to US$51 a barrel. Supply issues are the cause there – US output is rising and the market is doubtful on Saudi figures which it also suspects to be rising, casting doubts on the strength of the new OPEC agreement.

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 95: 2017 03 09:Week in Brief Financial

09 March 2017

Week In Brief: BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

URGE TO BE LARGE:  After the recovery from the 2008 recession and banking crash got underway, a positive meadow of small banks and quasi banks began to flower, filling the spaces left by the struggling big banks, especially the big four clearing banks (Barclays, RBS, Lloyds and HSBC).  The opportunities were mainly in the small business sector and in personal banking, where lending growth for the new entrants was greatly helped by the low rate interest rate environment – meaning that debt providers could charge highish margins that allowed for some comparatively risky strategies, and also for the high operating costs of being in that sector (small loans are expensive to run).  Some have prospered and a few have fallen by the wayside, the most visible success being perhaps MetroBank, whose branches are an increasingly common sight in south-eastern prime high streets.  But now the challenger banks are starting to feel the cold winter of competition – from each other, as they grow, from the partially resurgent clearing banks as they recover, from some serious majors such as Handelsbanken and Santander, and also the side winds of slowing demand in a lending market where longer term interest rates have risen and borrowers are being more cautious about business risk over the next two to three years.

Not surprisingly, the challengers are starting to look at how best to strengthen their balance sheets – Wellesley, the peer to peer operator which we looked at a few weeks ago, is busy capital raising to cover rising default risk in its property development focussed book, ICG Longbow is doing the same to grow and diversify its book – again mainly in property – where it wants to move into larger and more robust clients, and Shawbrook, which is a more generalist bank along the MetroBank model, though with a significant property angled loan book, has been approached by its main shareholder Pollen Street Capital, together with a partner, BC Partners.  Both are private equity funds which specialise in the financial sector, and they would like to acquire Shawbrook with a view to taking it private – Shawbrook was floated in early 2015 and is in the FTSE250.  Pollen own about 38% of Shawbrook already, but they have yet to convince their fellow Shawbrook shareholders that their offer, equating to around 328p is of interest.  However, the market view is that this is not an argument about principle – there is little advantage but a lot of cost to the public quote – but to what is a fair price for the business.  As little as 350p, an extra 22p, might swing it, say the analysts.

THE NEW AGE OF MOTORING:  Diesel is dead, petrol is passing, electricity is the eco-future.  That finally seems to be confirmed with the surprise announcement by Bentley, the prime luxury car maker, that they are to introduce an electric sports car; a proper Bentley with a soft top and just two doors.  Perhaps it is not such a surprise in the industry. Bentley has been known to be working on radical changes for its next generation of cars, and battery technology is moving on so fast that even a heavy, many accessoried, car such as a Bentley can get enough mileage out of battery packs to make an electrical version a viable proposition.  And Bentley is part of the Volkswagen Group, which, after recent bad happenings, is anxious to prove its green credentials both to the car buying public and to the regulators.  The new car is said to be capable of 310 miles on a single battery charge – not so far off what the Continental model will do on a tankful of petrol – although one problem common to all car makers is the time taken to charge batteries – up to four hours on a home charging point and maybe two hours on the new generation of commercial charging points.  There is another problem too – not to the car makers but to governments.  As electric propulsion is now growing fast, the impact of it will soon be felt on revenues from fuel based tax, so we are soon likely to see changes to the taxation regime for motorists – maybe to something more value based.  That will not be good for Bentley and other British (and Italian) luxury and fast car makers, though maybe if you can afford to buy the car, the tax bill won’t worry you.  Or perhaps it will – Bentley has not yet quoted a price for their new electric super-sports model.

SAILING ROUND WINDMILLS:  You’ve heard of wind power, you’ve heard of wave power, you’ve heard of tidal energy; but now here comes the ultimate: underwater windmills.  They are not windmills of course; they are watermills, turbines attached to the seabed which are driven by the flows of sea water and tides.  This may sound like fantasy, but they are real enough.  Four have been installed experimentally off the north coast of Scotland and they seem to be proving both technically reliable and good sources of constant energy.  The developer of them is Atlantis Resources, maybe not the wisest choice of name, but they say that they have now proven the concept.  They just need the money to make their sunken power city viable.  Atlantis would like to install another 260 mills underwater in the same area, which will bring great economies of scale in instalment, management, and power generation – and have been working on improved turbines that will be bigger and thus more economical to build and operate.  The site is not the most convenient – about as far from electricity users as could be – but the water is deep (so good for safety), the seabed suitable for holding the turbines in place, and the water flow strong and reliable.  The proposed full installation would produce up to 400 megawatts of electricity, enough to power about 175,000 houses, so the underwater farm would be a meaningful contributor to Britain’s power deficit.  Atlantis though needs government help to pay for the installation, and is bidding for a subsidy this year to build another 50 mills. The government is cutting back on subsidies for sustainable energy because of growing consumer resistance to the extra premium on bills, and also recognising that shallow water wind turbines seem to be reliable and cheaper to fund – and less controversial than their on-land cousins. Nevertheless, Atlantis hopes that the reliability of their model and their acceptability to landscape campaigners may win them some extra government support.

NOT QUITE OVER:  The London Stock Exchange says that its proposed merger with the Frankfurt Bourse is still possible and is continuing to work on the technical details (see our story last week).  It rather contradicted itself though with an increase in its dividend by 20%.  It is true that turnover was up by a similar percentage but profits were nearly halved for 2016. Commentators have said that the only reason to increase the dividend was to keep investors on side as the merger receded into history.

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

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.36% (slight rise); 5 year 0.71% (rising).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.07% (rising)

US$: 1 mth 0.83% (rising); 3 mth 1.1% (rising); 5 year 2.09% (rising)

Currency Exchanges:

£/Euro: 1.158, £ falling

£/$: 1.22, £ falling

Euro/$: 1.06, € steady

Gold, oz: $1,217, falling

Aluminium, tonne: $1,867, falling

Copper, tonne: $5,855, slight fall

Oil, Brent Crude barrel: $56, slight rise

Wheat, tonne: £146, rising

London Stock Exchange: FTSE 100: 7,263 (slight fall). FTSE Allshare: 3,953 (slight fall)

Briefly: Stock market up, commodities down (honourable mention for wheat which has shown increasing volatility over the last month) and sterling down, interest rates rising again, especially in the longer dated maturities, and with the Fed pushing for rates to rise. There is some economic nervousness around and it is showing this week; government spending in the USA and UK may start to drive inflation a little and the market is pondering on that.

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

Issue94: 2017 03 02:Week in Brief financial

02 March 2017

Week In Brief: BUSINESS AND THE CITY

Headline image saying £NEWS

STOCK NOT EXCHANGED:  It seemed the perfect match, but, before they even got up the aisle, trouble began – and now it looks as though it’s all off.  And probably to widespread relief.  The merger between the London Stock Exchange and its Frankfurt equivalent and rival, the Deutsche Borse, intended to create a world super exchange, seems to have collapsed, more or less at the last minute.  European competition regulators were said to be imposing additional late conditions, including that LSE should sell off its controlling stake in MTS, which is an Italian based minority owned business that sells governmental bonds for and to European governments.  LSE/DB had already being asked and agreed to sell the French arm of LCH Clearnet which is a similar selling agency, but the latest request was considered unacceptable because its Board saw it as a core part of the Exchange’s business. The Italian financial authorities are also opposed to such a sale, it is said, because it will weaken trading business in Italy and undermine Italy’s broader activities in stock and bond trading. The latest manoeuvre is said to be at the request of the French financial authorities to the competition regulator in Brussels, and is seen as national politicking in the deal to strengthen France’s position in European trading markets.

The deal has not completely gone away yet, as the managements of the two marrying exchanges have appealed against the requirement to sell MTS, but it is thought unlikely that this will be overturned.  And some commentators felt in any case that the merger was unlikely to happen, or at least unwise, once Britain voted to leave the EU in June last year, or until after the terms of that divorce had been agreed. That is also believed to be the preference of the British government, though generally ministers are keeping well clear of the subject at the moment. There is opposition in Germany to the merger – especially the requirement that the head office of the merged business will be in the UK, even though DB will have majority control of the super exchange.

PROGRESSING BANKERS:  The reconstruction of the Barclays Bank platform under not-so-new chief executive Jes Staley continues well.  Mr Staley has gone  in a different direction to his  predecessor Antony Jenkins, who wanted out of investment banking and into lower risk and retail operations.  Mr Staley is heading back into investment banking which he believes can present manageable risk if the right people are in place, correctly motivated and rewarded, and is potentially much more profitable in a very competitive world where adding value in retail (or at least charging for it) is increasingly difficult.  It is early days yet, but the results are slowly moving in the right direction – last year saw return on equity improve from 5.4% to 6.1% – not brilliant but 10% up.  The core measure of the bank’s capital robustness, tier one capital, increased to over 12% but represents money tied up in low returns, so progress on both fronts is good news.  The outlook for investment banking is also suddenly brighter, with opportunities created by the Brexit vote and Mr Trump’s election in the United States.  One policy that Mr Staley is continuing is disengagement from the less core parts of Barclays’ international empire, the latest bit likely to go being Barclays’ half ownership of its South African business.  That will help further boost the capital position, as will the board’s halving of the dividend on its ordinary shares.  In return the bank is changing the way it accounts for bonuses – an esoteric subject in accounting terms but one where the bank is taking a more conservative approach by accounting for the costs when it awards the bonuses, rather than when it pays them (many are deferred, awaiting results before they are paid).  The bank is building up capital quite rapidly which should enable it to look at taking on business expansion soon – except for one distant black cloud – the battle with the US regulators over alleged mis-selling in the USA market.  Most of Barclays’ rivals have settled out of court – at enormous expense – but Staley thinks proposals made to Barclays have been unfair, so he is preparing for a court battle.  That could be a protracted battle and an expensive one, so building up reserves is certainly the prudent thing to do.

RISING STAR:  Derwent is a very long established quoted company.  It originally owned a private railway and warehousing near York- but for many years has been run by John Burns and Simon Silver, who have turned it from a moribund shell into one of the most active, and highly regarded, office developers in London.  The secret of its success, born in necessity, was finding buildings and sites close to, but not in, prime office locations, where it could build cheap and cheerful developments and let them to tenants who were cost conscious and did not want to pay prime rents.  They had a particular knack of spotting locations that were beginning to gentrify, so they were able to buy raw material cheaply, and then hold as rents and yields improved while the smart set poured in.  Soho was an early favourite, then south Islington, and such East End spots as Spitalfields and Whitechapel.  As Derwent has grown, so has the scale of its developments, so that it can improve perceptions of locations simply by having a presence there.  All this has put it into the FTSE 250 and the  results this week show continuing progress – rental values up 5% to a total rent roll of £31m, vacancy rates exceptionally low at 2.6%.  The only bad news is that capital values fell just over 1.3% last year, reflecting a slightly weakening office market in London, but Derwent are still confident about its locations, with new developments in Whitechapel and Paddington; it underwrote that confidence by not just increasing the regular dividend by 25%, but also a special dividend of 52p per share to reflect the £225m of capital sales made in 2016.

OIL ADVICE:  A pointer to likely future trends in oil production – BP says that while at the moment it needs the oil price to be around US$55-60 a barrel to make money, it expects that to drop to under $40 by 2021 as new contracted supplies come on stream, and current capital expenditure reduces as the exploration phase produces results.

SLOW TRAIN FOR GO-AHEAD:  Go-Ahead Group may be regretting choosing that name, at least as far as its railway activities are concerned.  Whilst its bus division is performing well, the railway business, mainly commuter services south and north of London (including Thameslink, which connects the two), has suffered from the on-going industrial action on Southern relating to closing train doors, but at a deeper level from issues relating to the manning of trains and staff responsibilities.  Latest results, for the second half of 2016, show a fall in group profits of 12%, to £67m, all of that being due to the problems on Southern, with a loss there of £5m, and passenger numbers down over 3%.

KEY MARKET INDICES:  (as at 28th February 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.35% (slight fall); 5 year 0.67% (falling).

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

US$: 1 mth 0.78% (slight rise); 3 mth 1.05% (steady); 5 year 1.95% (fall)

Currency Exchanges:

£/Euro: 1.18, £ slight rise

£/$: 1.24, £ steady

Euro/$: 1.06, € steady

Gold, oz: $1,252, rising

Aluminium, tonne: $1,907, rising

Copper, tonne: $5,926, slight fall

Oil, Brent Crude barrel: $555.25, falling

Wheat, tonne: £144, falling

London Stock Exchange: FTSE 100: 7,263 (slight fall). FTSE Allshare: 3,953 (slight fall)

Briefly: A very steady week with some recent gains being modestly given up, but all reported commodities moving in recently established ranges. Perhaps the one to watch is gold, slowly moving up; not Euro long term rates, where our prediction that they might be back in positive territory was proven wrong within a week!

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 93:2017 02 23:Week in Brief Financial

23 February 2017

Week in Brief:BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

NOT YET FULLY FUELLED:  Anything to do with aerospace seems to be bad financial news at the moment.  British Aerospace itself continues to struggle through, hoping that times are getting better; Rolls Royce last week announced a whopping loss – though said that underlying trading is improving.  This week’s bearer of bad tidings is Cobham plc, the company formerly known as Flight Refuelling Ltd, which neatly encapsulates what it principally does, a business which is the root of its current problems.  Like Rolls Royce, Cobham has a new chief executive, David Lockwood, but he denied that this was the new man having a clear out;  it is, he pointed out, the fifth profits warning in 15 months – profit forecast reduced by a further £20m, but this one came with £750m or so of right downs and adjustments – a veiled warning that the company might soon need a rights issue to rebase the balance sheet.   Mr Lockwood blamed two main factors for the company’s problems:  firstly, well known issues on a contract with Boeing to supply flight refuelling systems to 179 fuel transporter aircraft for the US Air Force, a US$40bn contract in total.   Cobham is a subcontractor but is liable for key problems and penalties, which led to the £150m write down on the contract due to delays and “technical complexities”.  The second cause of trouble was the acquisition of Aeroflex, an American specialist maker of aerials and antennae, which has caused further strain and write downs, though the underlying business is said to be good with strong potential.  But current weakness on this contributed to a further £500m plus of write-offs.  On the other hand the future of  Cobham is closely linked to flight systems, especially to military applications, and this is giving Mr Lockwood some comfort.   Military spending is likely to go up over the next five years after many years of cuts to budgets. The combination of Mr Putin and the worn out nature of much kit – and the new American president wanting to kick start manufacturing to deal with employment levels – should create rising demand for Cobham’s products, in which it is undoubtedly the market leader.

MAKE MINE A HALF:  Given the trouble of the public house trade, which has suffered a long slow decline for over twenty years, with, it is said, a pub closing every week, it is wonder that anybody wants to invest in it.  Indeed Punch Taverns, one of the largest chains of pubs in the UK with 3,350 outlets, has decided to halve the size of its business, and bundled up 1,900 pubs for sale to a partnership of Heineken, the Dutch based brewer, and Patron Capital, a specialist investment fund which manages the endowment funds of Harvard University, amongst other clients, and which likes to look at the potential of specialised property assets to create extra returns .  The price agreed was £403m and all looked set far for an early closing and no doubt a couple of drinks to celebrate.  Until the Competition and Markets Authority turned up to spoil the party.  It has now started a formal investigation into the acquisition – pointing out that Heineken already owns 1,100 pubs in its Star division.  The investigation could take up to six months although the new Heineken based group will be smaller than the old Punch based group.  It is believed to have been prompted by objections from landlords of pubs in the portfolio that Heineken is much more rigorous in wanting to sell its own products through its chain than the present owner. The Star chain is believed to have 85% of its beer and cider products sourced from Heineken.  Landlords like to have flexibility as to where they source their stocks, so as to give an attractive choice to customers and to buy competitively. The management of Star has already said that they intend to allow the acquired pubs greater flexibility in buying, especially in their ability to buy from specialist and niche breweries and cider houses.  If the Competition regulator will not accept this there may be additional conditions put in place, though the deal is unlikely to be stopped altogether.

POWER CORNER:  The troubles of the electricity generating sector continue to hit the headlines.   Latest one to worry its investors is Drax group, whose keynote power station is the huge Drax plant in East Yorkshire, but which has and continues to diversify away from its old coal powered dependence.  Drax is one of the largest producers of power from bio-mass – renewable grown sources and wood chips, including at Drax itself, now 50% from green energy sources. But it is still one of the largest coal burners in the UK , with all its coal being imported from Europe, as indeed is much of its woodchip supply (some also comes from the USA and from the UK).  The company has struggled with political turmoil in the funding arrangements for biomass, losing a High Court action against the government early last year relating to subsidies.  On the output side, the company has also suffered from price volatility, and has now decided that it must adopt a more conservative dividend policy to protect its capital base; this was announced by chief executive Dorothy Thompson, who pointed out that underlying net earnings had more than halved from 2015 to 2016 and that in the current economic climate it was wise to be prudent.  The problem is that power generators have long been regarded by investors as stable utilities – like water companies – which can be held in an investment portfolio as low risk, if also low return, income.  If they cease to be seen as stable and low risk, that means required yields will rise and the share price will fall – as it did after Ms Thompson’s announcement.

OFF THE MARKET:  The sorry tale of the attempts by Royal Bank of Scotland Group to sell its Williams and Glyn division – a number of outlets principally in the north-west, W&G’s historic base, bundled up to sell as a condition of more banking diversification following the state rescue of RBS, seems to have finally concluded – without a sale.  RBS has had several bidders, the latest being the Clydesdale and Yorkshire Bank, but nobody could reach the price RBS wanted – which was itself allegedly below the costs (£1.8bn) incurred by RBS in trying to separate the W&G part from the rest of its operation; nor could bidders see how to give the group modern management and recording systems without huge further expense.

But now the UK Treasury is said to have reached an agreement with the European Commission that the de-bundling need not take place.  Instead the Treasury will provide around £750m to various bodies, including challenger banks and funds, to compete with RBS in personal and small business banking, and RBS will be required to provide clearing and cash systems to these competitors to increase competition.  Just a pity nobody thought of this before spending £1.8bn on trying to sell the unit…

KEY MARKET INDICES:

(as at 21st February 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.36% (steady); 5 year 0.74% (falling).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.01% (falling)

US$: 1 mth 0.77% (steady); 3 mth 1.05% (slight rise); 5 year 2.00% (steady)

Currency Exchanges:

£/Euro: 1.18, £ slight rise

£/$: 1.24, £ steady

Euro/$: 1.06, € steady

Gold, oz: $1,229, steady

Aluminium, tonne: $1,877, slight fall

Copper, tonne:  $6,002, slight fall

Oil, Brent Crude barrel: $57.03, slight rise

Wheat, tonne: £147, steady

London Stock Exchange: FTSE 100: 7,290 (falling).  FTSE Allshare: 3,997 (rise)

Briefly:   UK interest rates show some decline, unlike the dollar and euro, but elsewhere the picture shows little excitement; all eyes are still on copper with more industrial action taking place, but the price moved down a little – profit taking say the analysts. The FTSE 100 and FTSE Allshare moved marginally in opposite directions – a comparatively unusual event.

 

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 92: 2017 02 16: Week in Brief Financial

16 February 2017

Week In Brief: BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

LOOKING ON THE BRIGHT SIDE – AGAIN:  Last week it was regional newspaper publisher Johnston Press who got the Shaw Sheet Business Pages prize for optimism.  We have a new contender this week for our award – Rolls-Royce Holdings plc, who announced a pretty startling £4.6bn loss for 2016.  The weaknesses in performance reached across every division of the specialist engineering giant whose lead product is aero engines, but the loss was primarily due to two things; first, a one-off write down in the group’s derivatives book – a core management tool for hedging Roll’s massive exposure to many currencies as a major exporter, and, second, the £671m which Rolls has had to pay in relation to bribery and corruption offences.  But Rolls’ management said that the underlying trend was good, with underlying profits of £813m (after adjusting for the above items) showing a stronger than forecast performance and with forward trading looking stronger also.  The profits are down on 2015’s £1.4bn, but each division is showing promise of growth this year and next, with cost cuts in many key areas, but especially in engine servicing, seen as a major success in improving productivity without reducing quality.  Also improving is cash generation, which has for some time being a problem because of the business’s large capital costs and flows.  By the end of 2016, free cash flow was £100m positive (Rolls merely expected to break even last year) and the company hopes that it will rise to around £1billion by 2020, giving a much better platform for new investment and cutting borrowing costs.

Rolls-Royce had a new chief executive last year, Warren East, and he has had a busy time bringing in new systems and new people; and making sure he has cleared out any lurking problems.  Now it looks as though all is ready to go with a return to long term profit performance.

GOING NUCLEAR:  More trouble for those who think the long-term answer to pollution and carbon depletion might be electricity from nuclear generation.  The UK’s much reduced nuclear generating capacity is mostly run by EDF, the French state controlled electricity company which operates much of France’s nuclear power station network and all of Britain’s.  EDF has been struggling to maintain profits as government intervention grows in the power industry, and with increased shutdowns for safety reasons in France, which has meant cuts in French generating capacity.  In the UK output has held up well, but prices charged to the customer are not keeping pace with increasing costs – much of that coming from government imposed green levies.  On top of that are the well-publicised problems with Britain’s Hinckley Point station in Somerset, which is many years behind its intended opening date – work has barely started yet.  But all that is minor compared with the problems of the company which is supposed to be assisting in the renewal of Britain’s nuclear power base.  Toshiba, the Japanese conglomerate which owns Westinghouse, a builder of nuclear reactors, is a key participant in the scheme to build a new plant at Moorside in Cumbria to take over from Sellafield (or Windscale, if your memory goes back that far).  Toshiba will not only  build the reactors but also owns a 60% stake in Nugen, the developer of the scheme.  But Toshiba has been hit by a whole host of problems in other areas, including, and crucially, by huge losses in its USA nuclear construction plant business.  These forced Toshiba’s chairman Satoshi Tsunakawa to resign earlier this week and have seriously weakened the financial power of the business.  Toshiba says it will seek, when it can, to sell its shareholding in Nugen, though it is fully committed to building the Westinghouse reactors.  Nugen is not yet fully funded – it needs a total of £15bn and expects to complete fund-raising next year.  Construction will then start with the aim of bringing Moorside into generation in 2025, a programme which looks unlikely on current form.  Back to coal and oil for a while yet.

KING COPPER FACES REVOLT:  As we have been noting for some time, the improvement in the copper price (improvement if you are a copper owner rather than a buyer) has been accelerating for some time, driven by a lack of supply after mine closures a couple of years ago, and also by the mining workforce seeking pay rises after a long period of restraint.  Failure to agree a way forward has resulted in a strike at the world’s largest copper mine, Escondida in Chile, which last week led to violence in the mine, with damage to services so that the strike breaking contractors brought in by the mine owners could not work.  At another large mine – Grasberg in Indonesia – workers have also gone on strike, with further complications caused by a dispute between the Indonesian government and the owners over government profit participation.  And more trouble is forecast in the Congo, also a major supplier but with both labour problems and political issues.  On top of all this, existing copper reserves are not of great quality and the industry has not been investing in new facilities – such as Rio Tinto’s possible new mine in Mongolia – because of the low prices prevailing in the market.

END OF THE COUNTER:  for the Co-op Bank, once a major player in the retail banking market in the north and Midlands and a great influence in introducing banking to working class savers and borrowers.  Owned by the Co-operative Society, once powerful in providing everything from food shops to funeral parlours by way of savings and health care, but now sadly diminished by fierce competition and a failure to find new loyalties (and costs it gradually lost control over), the bank has been the most visible and embarrassing sign of the Co-op’s troubles.  The added embarrassments of a drug addicted Methodist Minister chairman, a terribly mistimed foray into large scale commercial property lending which wiped the balance sheet of capital in the 2008 crash, and a final self-inflicted injury caused by acquiring a broke building society in 2009, did not help.  The bank has tried to tidy up and return to its roots but this week finally admitted defeat.  Now the it is on the market, and no reasonable suggestion or offer is likely to be refused.

CALL DISCONNECTED:  The fighting between rival mobile telephone groups continues.  The latest twist is a salvo from Vodafone directed at EE, which won the contract to build a wireless network for use by the UK’s security and emergency services.  Many of the new masts for this will be in rural areas where coverage is patchy so Vodafone (and, no doubt other telecoms companies) would like to have rights to use the masts – rural masts are expensive and tricky to get planning permission for.  But EE is not identifying where the masts are until they are built – giving a first mover advantage in marketing its own domestic service.   Cue call from Vodafone to the Home Office to complain – let’s hope they can get a connection…

KEY MARKET INDICES:  (as at 14th February 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.36% (slight rise); 5 year 0.80% (steady).

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

US$: 1 mth 0.77% (steady); 3 mth 1.04% (slight rise); 5 year 2.00% (falling)

Currency Exchanges:

£/Euro: 1.17, £ slight rise

£/$: 1.24, £ steady

Euro/$: 1.06, € slight fall

Gold, oz: $1,230, steady

Aluminium, tonne: $1,892, slight rise

Copper, tonne: $6,110, sharp rise

Oil, Brent Crude barrel: $55.95, slight rise

Wheat, tonne: £147, steady

London Stock Exchange: FTSE 100: 7,304 (rising). FTSE Allshare: 3,974 (rise)

Briefly: A more active week in the market, with great excitement in the copper price (see article above) which broke through the $6,000 mark and powered on; other London commodities and stocks also strengthened.  In currencies not so much to report – but the 5 year euro rate seems to have finally returned to positive territory, whilst the 5 year dollar rate reached the 2% level.

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