Issue 123 :2017 10 05:Week in Brief Financial

05 October 2017

Week in Brief:BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

BUMP ON THE ROAD:  A little deflation to a British manufacturing success story.  Brompton, makers of those so-elegant and useful folding bicycles, has had to initiate a recall of every bike it has made since April 2014.  It has discovered a fault with an axle component which the pedals drive to, which can break, leading to loss of control.  There have been a number of failures on the road, with one rider being injured.  Brompton, which builds the bikes in West London in a new factory designed for it, said that the fault was within statutory safety standards, but nevertheless was not acceptable to it, so it will replace the piece on all 144,000 bikes that it has made fitted with them. The rogue part was made by a German partner company Schaeffler who presumably will be picking up the bill.

NOT FIT FOR PRINT: The long term decline in advertising in the print versions of newspapers appears, if anything, to be accelerating.  Latest newspaper publisher to issue its annual results is the Daily Mail and General Trust, owner of the Daily Mail (and an assortment of other assets as the effectively controlling Harmsworth family diversify away from its newspaper business). Advertising revenue from print was down 11% in the first half of 2017, a drop of £15m; but the news was far from all bad – online advertising revenue was up £19m.  The other sign of possible trouble ahead was a small decline in circulation of the online versions of the papers (and a bigger in print readership) but this was offset by price increases which pushed total revenue marginally up.

LOGIC OF LOGISTICS:  The UK real estate market, as mentioned here last week, is starting to get nervous about what happens next.  Except perhaps in the logistics market – sheds to you and I – where the growth in internet shopping means a need for ever larger quantities of storage and distribution facilities.  Not only that, the logistics companies keep rethinking what might work best; at one time it was super sheds – between 400,000 and a million square feet; now the fashion has moved to smaller sheds, at least for deliveries, much closer to the customers, so that those twenty-four hour delivery promises can be fulfilled.  One of the biggest providers of modern sheds, of all shapes and sizes, is Gazeley, a firm founded in the UK  about 30 years ago and now considered a European market leader in the sector.  Gazeley is currently owned by Brookfield Asset Management, a Canadian company and one of the world’s largest property fund managers, currently very active across western Europe in most sectors.   It has now agreed terms to sell Gazeley to Global Logistics Properties (“GLP”), a major Far Eastern investor domiciled in Singapore, for a price said to be around £2.75bn; the transaction will complete shortly.  GLP is one of the fastest growing logistics property owners in the world, but lacks a platform in Europe ; this deal fills that gap.  It also give GLP useful links with many major space users – for instance on its Magna Park development in the English Midlands, next to the M1 and M6 motorways, Gazeley has lettings to many major retailers, including the John Lewis Group,  Toyota, Argos, Tesco, and most recently, Amazon.  Brookfield bought Gazeley four years ago as part of a European strategy for expansion in the sector and the sale is something of a surprise, but certainly the price reflects the fact that the sector is thought likely to see continuing growth.

STEELING THEMSELVES:  At first sight, a merger of international giants in the steel making industry does not seem likely to bring much good cheer to steel plants in Britain, one of the most expensive places in the world to make non-specialist steels.  That is because of the low productivity of UK’s mostly old fashioned old fashioned and under-invested plant, high wage and energy costs, and lack of any natural competitive advantage such as raw materials – other than a large local market in the car and construction industries.  Late last week ThyssenKrupp and Tata Steel announced they were to merge their European steel businesses to take on the market leader in Europe, ArcelorMittal, and also to cut €600m a year of costs out of their operations.  If the new merged business gets regulatory approval as expected, it will have 34 locations in Europe, making over 20 million tonnes of steel.  Initially it will have about 48,000 employees, but up to 10% of that workforce is likely to go as the businesses are merged, a process which is expected to begin in 2018 and conclude in 2020, at which time there will be a further review as to how the business will go ahead in the longer term.  That would seem to present a threat to Tata’s troubled operation in Port Talbot in South Wales, employing about 4,000 people, which almost closed nearly two years ago but was then reprieved.  The merging companies have however confirmed that there is now no current intention to close it as an important part of the group’s operations.  That of course may change after 2020.  Tata employs another 2,000 workers on smaller sites in Wales, and also in specialist units elsewhere, but these are mostly makers of specialist steels and less under threat than general steel making plants.

MODEST IMPROVEMENTS:  Kingfisher is the UK giant of the do-it-yourself retail business, owning in Britain B&Q and Screwfix, and also substantial similar operations in Europe, especially in France and Poland.  This was long a growth business for most players in the sector but we seem to have lost the urge to do-it-ourselves and prefer that somebody-else-does-it-for-us.  That meant a painful overhaul of Kingfisher’s operations, with stores closed, and much cost cutting.  That produced some improvement last year but this year was predicted by observers to be more difficult.  In the event Kingfisher proved them wrong – just – by showing profits up one percent on last year, at £440m for the first half of 2017.  In fact, said the company, the UK performance was even better than those bare figures might suggest, but was held back by a weaker outturn in their French business. Although the company thinks the second half might be more difficult in both the UK and France, it notes that the Screwfix business continues to grow, although B&Q has seen declining turnover.  It believes that it is more or less on track in its grand strategy to double profits over the next four years – but that will require Mr Macron to get to work on the French economy to stimulate spending growth there.

KEY MARKET INDICES:

(as at 3rd October 2017; comments refer to net changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, (unchanged): 3 month 0.34% (rise); 5 yr 1.04% (rise).

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

US$: 1 mth 1.23% (down); 3 mth 1.33% (steady); 5 year 2.00% (rise) 

Currency Exchanges:

£/Euro: 1.13, £ falling

£/$: 1.33, £ falling

Euro/$: 1.17 € steady. 

Commodities:

Gold, oz: $1,273, fall

Aluminium, tonne: $2,066, fall

Copper, tonne:  $6,454, slight rise

Iron Ore, tonne:   $62.86, steep fall

Oil, Brent Crude barrel: $56.18, fall

Wheat, tonne: £142, rise

London Stock Exchange: FTSE 100: 7,468 (rise).  FTSE Allshare: 4,098 (rise)

Briefly:

The week’s loser is iron ore, which having come off its peak last week then fell$8 a tonne this week; oil too fell back but many observers of oil remain bullish and say this was due to some profit taking and nervous positions.  Wheat continued a modest recovery, with western harvests now in.  And the FTSE100 looks to be making for 7,500. Perhaps.  Interest rates continue to edge up.

 

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Issue 122:2017 09 28:Week in Brief Financial

28 September 2017

Week in Brief:BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

COPPER TOPPED:  Over the past few months those who followour summary commodities index at the end of this section will have noted the steady rise in the price of copper.  Although this is in a reality a return to the trading band of 30 or so months ago, after which King C took a spectacular dive, many commentators are saying that this is a likely to be a permanent change.  Copper is a metal which has many and increasing industrial uses, and because of its electrical conductivity and resistance to corrosion, it is for many applications the ideal raw material.  It is hard wearing, easy to manipulate, not prone to splitting or fracturing,  and also, as many interior designers are currently espousing, very attractive – bare pipework is the theme du jour.  The previous boom was caused by a shortage of copper – quite an expensive metal to mine and process – so higher prices can suddenly make many previously unviable mines profitable again.  But that of course brings its own demise – the supply goes up, the price comes down, and all those marginally profitably mines shut down again.  Back up goes the price and that is what we are seeing to some extent now, but perhaps, if we believe the pundits, with a new factor.  That is a rising force which is going to change so many industrial businesses and processes – the rapid rise of the electric car, whether all electric or assisting a conventional based motor.  Not good for oil, though the oil powered power station may yet stage a recovery to produce all that extra electricity, but very good for all that goes into electric engines.  Such as copper, which is pretty much essential, for many wires and connections and most of all, for the tightly wound coils inside the electric motor.  There are no substitutes for that which begin to approach copper’s conductivity and resilience.   Most forecasters agree that within 20 years or so we will have well over 100 million electric vehicles on the roads, 500 million say Bloomberg, (providing that we can find the way of connecting them to the power sources that we have yet to build) and that will mean we need less iron and much more copper.

As it happens there have not been any significant new discoveries of copper over the last ten years.  Most production is from giant mines in Chile, Australia, and Russia, with smaller operations more widely scattered, but the common feature is that many mines are approaching the point where they are digging out the less accessible and more difficult to mine sources, so we are moving towards the speculators dream – less supply and long term significant increases in demand.  Not just the speculators – the two big mining companies with interests in copper are BHP and Rio Tinto, both of whom have been through some pretty tricky times recently, but are now feeling much better about future business prospects.  Unlike gold, you cannot really go out and buy an ounce or even a pound of copper, and buying a tonne might present storage difficulties to most of us, so many speculators will have to content themselves with buying shares in one of the two mining giants – which is no doubt why the share price of both of them is up around 40% over the last year.

SUMMER’S LEASE:  The commercial property market has had a long run of recovery since its near collapse in 2008 and 2009; now the market is starting to think about when the next downturn will come.  Property is a cyclical business so this is not unjustified gloom, but the questions are when the downturn will come and how severe it might be.  Certainly a lot of new office and retail space has become available to the market, and in the office sector there is quite a lot still in the delivery process, though much of that is thought to be pre-let to tenants.  But it is the letting side that is starting to worry landlords.  Retailers are looking very closely at their costs and as so much of that relates to property costs – rent and rates – many are looking to downsize or give up less viable units, and on-line shopping is likely to accelerate this trend.  On offices, the uncertainties of Brexit are putting some occupational plans on hold, especially in the City of London, though in the regional markets things look slightly different with good economic performance and less new space availability (and big cost advantages against central London) keeping the market steady and moving rents upwards.  Shaftsbury are a quoted property company whose main business is owning retail property in central London, mostly in Covent Garden and Soho.  Their recent results started with the good news – more shoppers in the area where its property holdings are concentrated and small shops been eagerly taken up by new tenants when they become vacant,  but the bad news followed; the demand for larger spaces, in retail units but especially in offices is noticeably slowing, as tenants put expansion plans on hold or delay making decisions as to renewals.  In particular, their Thomas Neal’s Warehouse, formerly a mall of small shops but expensively converted to one huge shop of 22,000 square feet, has been available for leasing for over a year – and still no takers.  Expect much scrutiny of other property company’s first half results as they come through.

NOT SO SUPER: Aldi reflects what seems to be the general trend in food retail for last year – sales up, margins and profits down.  Aldi is privately owned, by a German family, but issues detailed results for its UK business – which to end December 2016 show turnover up 13.5% to £8.7bn but net profits down 17% to £211m, a slender 2% margin, in line with market but a long way from the 5/6% margins which were considered normal ten years ago.  It was those that lured Aldi and its rival Lidl into the UK market in the first place – and is still better than in the cut throat German home market where food margins are around 1%.

CARDS, SHARPED:  It’s not just in fashion retailing where conditions are difficult.  The Card Factory, the quoted specialist retailer which does what it says on the card, saw profits down 14% in the first half of the year (to 31st July) which it says was due to increased costs (much stock is imported from overseas) and rising wage costs across its chain of nearly 990 shops (it opened another 30 in the review period).  The chain says there are also less shoppers on some high streets, but that overall takings were up (by 6%) and that the public are still sending more and more greetings cards to each other.  It maintained its dividend and also is paying a special – it does not need all the cash it is generating.

KEY MARKET INDICES:

(as at 19th September 2017; comments refer to net changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, (unchanged): 3 month 0.33% (steady); 5 yr 1.03% (rise).

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

US$: 1 mth 1.24% (steady); 3 mth 1.33% (slight rise); 5 year 1.94% (rise) 

Currency Exchanges:

£/Euro: 1.14, £ rising

£/$: 1.35, £ steady

Euro/$: 1.17 € weakening 

Commodities:

Gold, oz: $1,292, fall

Aluminium, tonne: $2,115, slight rise

Copper, tonne:  $6,422, fall

Iron Ore, tonne:   $70.05, fall

Oil, Brent Crude barrel: $58.22, rise

Wheat, tonne: £140, fall

London Stock Exchange: FTSE 100: 7,299 (steady).  FTSE Allshare: 4,004 (steady)

Briefly:

The general pattern this week is of markets coming off their peak; perhaps influenced by the recovery of the oil price, often a contrarian driver.  But gold too eased, and this suggests that the market increasingly does expect longer dated international interest rates to make a move upwards – and stay there.  That is certainly what the dollar is doing and the Fed is making clear that, so far as it is concerned, the days of QE are over.

 

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Issue 121:2017 09 21:Week in Brief Financial

21 September 2017

Week in Brief:BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

NEVER KNOWINGLY OVERPROFITEERING:  It’s shaping up to be a very mixed summer of results from retail, with fashion chains, department chains, and food retailing all seeing big variations in performance.   Latest results to surprise the market are from that British favourite John Lewis Partnership, (including Waitrose, its upmarket food and supermarket chain) who announced that first half profits in 2017 were half those of the same period last year.  JLP saw sales up a couple of percent, with good results from womenswear and from beauty products, but operating profits 10% down, which after some heavy costs for restructuring of operations (£21m) hit the bottom line dramatically.  And no help from Waitrose which is feeling some consumer resistance on prices as premium end competition hots up; profits were down over 8% and there were some restructuring costs there too.  However JLP made some promising noises about the department store business where customer loyalty is holding up and those restructuring costs should pay off in lower ongoing costs in the future.  WM Morrison who also reported half year results also said customers were focussing on value, especially own brands – but that was bringing some former customers back and helping Morrison through strength in its own brand goods.  That meant profits up 40% – from a lowish base admittedly.

AND THERE’S MORE:  Specialist fashion results continue to give a very mixed picture.  French Connection had a bad year last time and is not out of the red yet; it lost £5.7m in the six months to end of July this year and turnover is down £1m, but costs have been cut, underperforming stores have been closed, and the losses reflect the costs of getting back to what Stephen Marks, the chairman and founder of the business, said should soon be profitable trading.  Mr Marks has a new incentive plan to make sure he performs and a quarter of the business is now owned by Mike Ashley of Sports Direct who knows a thing or two about cost control.   Meanwhile at TK Maxx, the specialist fashion discounter, things are not looking so good.  Sales were up a tiny percentage on like-for-like figures, it says in its UK results for last year (to 31st January 2017) and profits were down by £31m.  The business is still in expansion mode, opening 24 new shops last year, the cost of which is weighing on performance, but not so much, the business says, as a general rise in salary levels in the UK.  And Next, regarded as one of the best run of the fashion chains, also said it expected profits to be up as customer spending was looking promising, albeit the pound was causing continuing pressure on costs of imported stock.  Next did say that the present trading position was showing some fragility and that investors should not get overexcited.  The share price rose 12% anyway…

LEATHER SEATS OR A CREDIT CARD? The latest figures from the car industry to cause astonishment are not to do with emissions or power sources, but finance.  The collective European car industry has a loan portfolio of around €400bn – that is not what it owes, but what its customers owe it for finance deals on (mostly) new cars.  Traditionally if you wanted a new car and couldn’t quite stretch to the machine of your dreams you went and talked nicely to your bank manager – or in reality filled in an on-line application and hoped your credit score was OK.  Then the car companies, who as retailers tend to have strong cash flow, realised that this was a business they could fill; and they have.  So much so that  long ago they had to fund the business by turning themselves into quasi banks – getting banking licenses, taking deposits, and issuing bonds to help fund their ever growing loan books.  The main players are the three big German car builders – Volkswagen, BMW, and Daimler (Mercedes), and also Renault, but most car companies have some activity in this business.  Indeed Ford in the USA has long had a sophisticated financial service operation.  Margins on car loans are very attractive whilst competition to sell cars is very tough – so finance has become a major source of profits for the car builders.  But it is increasingly becoming a major headache for financial regulators who worry about the carmen’s expertise, their exposure to one product, and a risk strategy that depends on the used car market providing continuing exits for maturing loans.  The increasing rate of depreciation of diesel cars is just an instance of where a structural risk can come back to bite on what looks like a safe loan.  Growth in car company finance has now run at over 10% per annum for three consecutive years which is the sort of rate of growth regulators start to worry about.  Maybe time to get that new car on order while the money is still there.

LONGER LIFE: At least your car should have a reasonable life, if only to ensure the finance company gets its money back.  Not so, you may think, your printer or washing machine, or even your socks.  You are probably right – many of these products are built to have a limited lifespan.  Of course, to an extent all products are built for a limited life and could go on much longer if they were built more robustly, but the sale price would then make them inaccessible to most buyers.  But some products are alleged to have particularly short lives and home printers are one that is frequently mentioned – not least as replacement ink cartridges can be almost as expensive as buying a new printer.  Those cartridges you may have noticed have another odd feature – when they signal you electronically that they are empty often they have quite a lot of ink still in them.  But so far the only country to tackle this problem is France, where in 2015 a law was introduced to make it an offence to deliberately limit the lifespan of a product, where it could be extended at minimal cost.  So far there have been no prosecutions under this law – alleging what the maker is doing is one thing, proving it is entirely another – but all four major printer manufacturers are now being sued in a French version of a class action, alleging that they make their printers for unnecessarily short lives.  No UK politician has yet taken up the cause – maybe their printers are out of ink – but the European Commission is now considering similar legislation in the EU.

KEY MARKET INDICES:

(as at 19th September 2017; comments refer to net changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, (unchanged): 3 month 0.33% (rise); 5 yr 0.99% (rise).

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

US$: 1 mth 1.24% (steady); 3 mth 1.32% (slight rise); 5 year 1.86% (rise)

 

Currency Exchanges:

£/Euro: 1.13, £ rising

£/$: 1.35, £ strengthening

Euro/$: 1.20 € slightly stronger 

 

Commodities:

Gold, oz: $1,328 slight fall

Aluminium, tonne: $2,100 slight rise

Copper, tonne:  $6,736 slight fall

Iron Ore, tonne:   $75.22, fall

Oil, Brent Crude barrel: $54.30 rise

Wheat, tonne: £142, fall

London Stock Exchange: FTSE 100: 7,404 (steady).  FTSE Allshare: 4,057 (steady)

 

Briefly:

Last week’s comment would do just as well for this week.  Sterling interest rates continued to move up on talk that the Bank of England will soon try to move Base Rate up, with five year  rates especially moving out – 20% up in a couple of weeks. The pound continued its rally against the dollar, and, marginally, against the euro.  But everything else looked weak and drifting, though oil moved up a little.

 

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Issue 120:2017 09 14:Week in Brief Financial

14 September 2017

Week in Brief:BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

BUILDING A NEW MODEL:  You might think that with Lego popping up on so much family time advertising – not to say those damn bricks all over your carpet if you have children of a certain age – that things must be good for the Danish domiciled toymaker.  But far from it; it seems.  As the chairman, Jorgen vig Knudstrop, said last week “The car has run off the road and we are a bit stuck in the ditch”. Which is a very frank way of revealing that sales revenue is 5% down in the first half of 2017 – the first time it has declined since 2004.  Lego has a chequered profitability history this century, but overall has seen some pretty impressive growth, and indeed remains a very profitable company – but one that is increasingly worried about where sales are going to be coming from in the next months and years.  The reason can be easily guessed; children seem to prefer virtual games to real bricks.  Lego has tried to tap into that market in a way that still might attract its junior customers to the traditional Lego offering, with concepts such as Lego Batman and Nexo Knights, and whilst these have had some success they have not been nearly as successful as hoped; at the same time the company’s cost base has increased enormously.  It has, for instance, 18,000 employees – up from 6,000 or so in 2004, and insiders say a lot of this extra effort is going into complex internal reporting and administration.  Mr Knudstorp is now trying to get a grip on costs by reducing the workforce by some 1,400 jobs and getting some efficiencies in how new products are developed and presented to the market.  One of the jobs already removed is that of Bali Padda, formerly chief operating officer and largely responsible for the internal reporting structures, who was promoted only in January to chief executive.  After just eight months in the job, he was asked to leave in August.

GOLD PLATED:  The silly season is over in the media – just as well as not even the silliest financial sub-editor would run this one:  Goldman Sachs is launching a UK retail banking operation.  From Masters of the Universe to sending out paying-in books is an unlikely step, but Goldman’s is on the way.  They hired Des McDaid formerly of Lloyds TSB earlier this summer and he is busy finding a support team and planning to set up a call centre, with the aim of opening an on-line banking business next year.  There are no plans to start opening high street branches; the UK operation is following in the footsteps of a similar operation in the USA which opened up about a couple of years ago. These new businesses are aimed at customers of considerable resources – those who have spare cash to put on deposit and want a good rate of interest on it.  There is however no effective minimum deposit and the bank in the US offers a range of deposit accounts.  It is understood to have taken amounts well above projections, so much so that the bank has opened a lending business – called, for reasons which no doubt make sense to Goldmans, “Marcus”, which has also done very well, making around US$1bn in loans in its first nine months trading.  But it is the deposit side which is driving this new activity – banks increasingly want to diversify their sources of funding, and consumer deposits for a stable institution with a reliable platform can be very useful indeed.  Also, as Goldman’s have realised, rich depositors offer interesting opportunities for selling other products, into a market which is still very focussed, in the UK at least, around a small number of big banks whose customers are much less loyal than they used to be.

HABEOUS CORPUS:  But not yet.  Body Shop, once one of the most visible and probably the coolest of British retailers, changed hands last week when L’Oreal finalised its sale to Natura Cosmeticos, the Brazilian retail group.  Natura also announced the departure of chief executive Jeremy Schwartz  and said he would be replaced by a new one; in fact they said the hire had been made, declining to provide a name – though they said he was British and male.  Well, that narrows it down a bit.  The price paid by Natura for the business was around €1bn, taking the group into the increasingly big time – it expects combined sales to be about US$3.7bn and it will have 18,000 employees (plus the mystery one).  Body Shop has lost its way somewhat since the death of founder Anita Roddick and its subsequent sale by the Roddick family; her entrepreneurial flair got it lots of free publicity, but also the business has faced challenges from newcomers such as Lush, and from traditional retailers such as Boots who now have organic ranges of their own.  Natura said it wants to refresh Body Shop’s retail offer, and also explore new marketing routes, such as the direct sales agents it uses in its Brazilian business.  It is said to have 1.8 million of them.

PILE IT HIGHER:  Another British retail chain though continues to prosper.  Primark, owned ultimately by the Canadian Weston family but run through their Associated British Foods business, says it has had a good summer and that trading margins are up – its forecast in the spring was that they would be down because of the weakness of sterling.  That does not come off spectacular sales growth – up about 1% says the company, but is  due to clever buying and good stock control.  That 1% should go straight through to the profit line, which should be further assisted by the 30 new shops it opened over the last year, three of which are in the USA.  ABF’s food business did not do quite so well – revenue was flat and margins were squeezed, though currency gains should help profits along.

COOL, MAN:  Clinical depression is an ever increasing problem in many Western countries, with much stress and strain for individuals and families and loss of both productivity and pleasure, to say nothing of further demands on the National Health Service.  Now the latest possible solution: magic mushrooms.  Not smoking them; that might ease or intensify depression.  But all those hippies who use them to feel better about life may have a point – scientists have discovered that psilocybin, which is the “magic” bit, can indeed have a very beneficial effect on patients with depression when properly prepared and administered – up to a third of patients show great improvements and there do not seem to be any significant bad side effects.  Compass Pathways, which is a British company recently started up to research into and produce a new generation of cheaper and more effective drugs, is the leading researcher in this area and is now discussing drug trials with European regulators.

KEY MARKET INDICES:

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

Interest Rates:

UK£ Base rate: 0.25%, (unchanged): 3 month 0.29% (rise); 5 yr 0.72% (rise).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.06% (rise)

US$: 1 mth 1.24% (rise); 3 mth 1.31% (fall); 5 year 1.77% (fall) 

Currency Exchanges:

£/Euro: 1.11, £ rising

£/$: 1.32, £ steady

Euro/$: 1.19 € slightly stronger

Commodities:

Gold, oz: $1,328 slight fall

Aluminium, tonne: $2,100 slight rise

Copper, tonne:  $6,736 slight fall

Iron Ore, tonne:   $75.22, fall

Oil, Brent Crude barrel: $54.30 rise

Wheat, tonne: £142, fall

London Stock Exchange: FTSE 100: 7,404 (steady).  FTSE Allshare: 4,057 (steady)

Briefly:

Last week’s performance with almost everything rising looked too good to be true and this week proved it – though most measures marked time rather than any spectacular movements.  However, the pound strengthened against the dollar and fractionally against the euro on rumours of sterling rate rises coming down the track, and wheat prices fell with most of the harvest in Europe and the USA in.

 

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Issue 119:2017 09 07:Week in Brief Financial

07 September 2017

Week In Brief: BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

BACK IN CREDIT:  The long running saga of the restructuring of Co-Operative Bank has finally concluded.  After various attempts to procure a sale, or a major backer, as covered in these pages, the existing five hedge fund owners have finally decided to do it by themselves (plus one new hedgie investor, Anchorage Capital Group).  They are putting in another £250m of new money, and converting £443m of shareholder loans to equity.  This gives the bank a stronger capital base and should reassure the regulator that there is sufficient committed liquidity to deal with any likely problems.  The loser in all this is the bank’s former 100% owner, the Co-operative Group, which had to dilute its ownership to 20% when the bank was rescued after a series of loan write downs (mostly in commercial property) and board room troubles after the 2008 banking crash.  Now Co-op Group is to be further diluted – to a mere 1% of the shares.  The bank’s few remaining small investors have also taken a haircut – not that they will be able to afford one after this, being bought out at 45p in the pound, payable in cash.

The bank has made great play with being the UK’s only true ethical retail bank and says that this will continue to be its USP; it expects a rapid return to profitability now the distractions of recapitalisation have been removed. It will face some stiff competition in rebuilding its mainly Midlands and Northern customer base but it will continue under the Co-op brand which, given the continuing strength of the Co-op food retail business, should help.  However there is one small cloud on the distant horizon – hedge funds are not usually long term owners of businesses and, if the bank can be returned to profitability, it is likely that they will want to sell out within the next five years or so.  So there may be yet more turmoil in the boardroom to come.  But at least the balance sheet is sorted.

NEW LOOK, OLD TECHNIQUES:  Fashion continues to operate revolving doors for senior management.  The latest retail fashion chain to spin the exit is New Look, which last week saw the departure of its chief executive Anders Kristiansen, paying the price of a year of sales going in one direction – downwards.  Last quarter’s results, just out, showed that sales were down 7.5%, which took the profit performance from a plus of nearly £6m to a loss of more than £15m.  New Look is owned by the South African conglomerate Brait, which bought it about two years ago, Mr Kristiansen already being in situ – indeed he was one of the reasons Brait bought the business as he had turned it round having been brought in by the previous owners.  He had cut the size of the UK chain, brought in separate men’s stores, and opened 110 shops in China, but fashion is all about…fashion, and just recently the chain does not seem to have got that vital element right, meaning a diminution in footfall and price cutting to try to shift the stock.  Mr Kristiansen had a sort out of his buying and merchandising team, but too late it seems; he had to pay the price of getting it wrong and left immediately, whilst the company begins the search for a new (and more fashionable) leader.

SAME LOOK, SAME PERFORMANCE:  Fashion retail can pay consistently though maybe it helps if you don’t have any shops.  Boden, owned by the Boden family began as an upmarket catalogue clothing business and is now an online upmarket clothing business.   Profits last year continued a long term rising trend – up 9% to £26m from sales of £308m.  About 40% of sales come from the USA now, mostly east coast, and that element is expected to rise further.  Boden is about to take a dangerous step though – it is opening its first high street shop. In Chelsea….that must be OK.

MORE AND MORE:  Manufacturing growth in the UK is showing further growth, the latest manufacturing purchasing managers’ survey shows. The index is not only showing an increase over the last four months, but also that growth is accelerating (slowly).  Although one might assume that this is due to the continuing, indeed accelerating, weakness of sterling, in fact most growth seems to be domestic, suggesting a pick-up in investment.  Growth in the export sector is from Europe, the USA, Australia, and China, all economies which themselves are expanding.   This seems likely to further improve employment statistics, and may even give that push to wage growth which the Chancellor would like to see, providing of course, that it is linked to productivity.

BRINGING THEM BACK:  Asda, the big four supermarket giant, has also been the weakest of the big four for some time – as the one with the most “value” focussed approach it has also suffered most from the rise of the German discount traders, Aldi and Lidl.  Asda is owned by the US superstore leader Walmart, and, although it accounts for only 6% of Walmart’s worldwide business last year, Walmart decided the time had come to intervene and turn Asda round.  It brought in Sean Clarke, an experienced Walmart veteran, to succeed Andy Clarke in the hot seat – not to be confused with Philip Clarke ex of Tesco (you don’t have to be called Clarke to lead a major supermarket chain), and Sean C has quickly applied his experience from Walmart in the US to turning the business round.  That has meant trying to get its former price conscious customers back by cutting prices and competing head-on with the Germans.  It seems to be working; before Sean’s arrival Asda lost 7% of its footfall in one quarter, but that erosion has reduced and in the second quarter this year the stores returned to positive growth of nearly 2% (that is 275,000 new or returning shoppers, says the store chain).  Unlike its rivals Asda is still opening new stores (albeit cautiously) and it also has the advantage of the popular George clothing brand which is a big draw in its larger outlets.  It has no high street units, a market which it decided not to enter some time ago.  Now it is probably too late to do so, but given the ferocious competition at that end of the market, Asda may well be better out of it anyway.  It has the weakest on-line offering of the big four which Mr Clarke is improving but he says that the core of what he is doing is just getting the basics right, the right stock, the right price, an attractive appearance, a clean tidy layout, and friendly staff.  Get that right he says, and the customers will arrive.  So far, it seems to be working.

KEY MARKET INDICES:  (as at 5th September 2017; comments refer to net changes on last 21 days; $ is US$)

Interest Rates:

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

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

US$: 1 mth 1.23% (steady); 3 mth 1.32% (steady); 5 year 1.74% (fall)

Currency Exchanges:

£/Euro: 1.09, £ slight fall

£/$: 1.29, £ steady

Euro/$: 1.187 € slightly stronger

Commodities:

Gold, oz: $1,335 rise

Aluminium, tonne: $2,095 rise

Copper, tonne: $6,872 rise

Iron Ore, tonne: $77.87, rise

Oil, Brent Crude barrel: $53.21 rise

Wheat, tonne: £148, rise

London Stock Exchange: FTSE 100: 7,402 (rise). FTSE Allshare: 4,060 (rise)

Briefly:

Whether the markets are reinvigorated by the summer break or by the possible crisis in the Far East, every commodity – and the LSE – was up this week (which covers the last three weeks after our own summer break).  The considerable strengthening of the gold price and the reversed trend in oil suggest that the reason could be the latter one.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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

 

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