The inside word from the City: Blog

Taylor Wimpey: Another brick in the wall

Wed, 02 Jul 2008 09:54:28 GMT

Corporate life hangs in the balance for Taylor Wimpey which sacked its finance director today after it failed to secure rescue funding. The ailing house builder, which doesn’t expect tough trading conditions to improve any time soon, runs the risk of breaching banking covenants if the housing market gets any worse. Shares in the company halved this morning, hitting 30p. In total they have lost 91 per cent of their value over the past 12 months. And to add insult to injury, other weak performing house builders’ shares felt the collateral damage, with Barratt and Persimmon also down 23 per cent and 17 per cent respectively.

Chris Millington, analyst at Numis, cut his target price on Taylor Wimpey’s shares to a mere 60p from 248p, but even that seems a tad optimistic now in light of this morning’s slide. Mr Millington reckons that despite the dire performance of house building shares this year and the grim outlook, value is out there but is better pursued through Berkeley and Bellway.

Meanwhile, Cityblogger notes Marks & Spencer shares are feeling the heat after the retailer shocked the City with an unexpected profit warning. Like-for-like UK sales (over the 13 weeks to 28 June) declined by 5.3 per cent and the shares are down a painful 20 per cent today. The retailer has also sacked its food director after food sales slid by 4.5 per cent. Chief executive Stuart Rose, who is expected to become chairman soon despite opposition from corporate governance groups, blames falling consumer confidence and told the BBC’s Today Programme that he believes inflation for the “average man in the street” is far higher than 3 per cent.

Eithne O’Leary, analyst at Oriel Securities, rates M&S shares as a sell. She fears that the sharp drop in like-for-like general merchandise sales shows there is a problem with M&S women’s wear. “But the killer blow is management's inability to predict the gross margin, a fact that will worry those like us who fear inflationary pressure can’t be passed on,” she points out. Ms O’Leary believes there are “no quick solutions” for M&S and that the retailing sector as a whole will suffer the fallout of this profits warning.

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FTSE falters in housing market gloom

Tue, 01 Jul 2008 09:36:53 GMT

The sun may be shining – as he writes Cityblogger is busy smearing himself with cut price BOG-OFF sunscreen in a nod to the credit crunch - but the lacklustre markets continue to cast a shadow over our summer.

After a reasonable day yesterday, following Friday’s sea of red, the FTSE100 is down more than 2 per cent this morning and currently stands at 5,496. More gloom on the housing market front is largely to blame. The latest report out today from building society Nationwide says that house prices declined for the eight consecutive month in June, falling 0.9 per cent and standing at more than 7 per cent lower than the house price peak in 2007. True, this price decline compares favourable with the sharp 2.5 per cent fall in May. But with the lowest number of new home loan approvals recorded by the Bank of England in May, economists foresee more doom and gloom on the horizon, such as a likely fall in consumer spending which could hit other sectors of the economy besides the property market and house builders.

Carpetright’s chairman Lord Harrison complained to investors this morning that 2008 will be the most difficult year for flogging carpets that he has experienced for 50 years. The retailer issued a profits warning alongside its full year results and the shares dipped by 6 per cent. Shares in HMV were also down 7 per cent despite a seemingly upbeat set of results, with profits up 25 per cent. But analysts are concerned that despite the impressive turnaround by the retailer, in the long term it still faces sales erosion from internet music downloads.

On the bright side, beleaguered Barratt Developments has received a welcome lift. Shares in the struggling house builder bounced upwards by 7 per cent this morning to 62.25p, following rumours the company is close to securing funding from lenders which will enable it to relax its banking covenants and weather the property storm.

Meanwhile, the City waits with baited breath for the Bank of England’s rate decision due next Thursday, but insiders widely expect there to be no change. “[It’s likely] we’ll stay where we are until the end of the year,” David Buik at BGC Partners told Cityblogger this morning. “There is a school of thought that if the economy gets into real problems then we could see a cut in October and then in November, but I imagine [the MPC will say] that we have to have the pain before we have the gain.”

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Fear and loathing on the FTSE

Fri, 27 Jun 2008 10:50:27 GMT

It's a veritable blood bath out there today in the markets. If yesterday wasn't a bad enough day on the FTSE100, the index slipped below the 5,500 mark this morning, hitting the miserable depths of 5,483, although it has since clawed back some ground to reach 5,533. But 5,483 marks a two year low for the index. Heavy selling on the US and Asian markets are to be to blame, as well as worries about consumer spending and the soaring price of crude oil, which touched $142 a barrel today.

And frankly Cityblogger believes it's hard to see this volatility ceasing in the near term. There's simply no confidence or appetite for risk out there, and it's unlikely to change any time soon, until we have some really palpable positive economic news.

Market misery aside, Cityblogger wishes you a relaxing and pleasant weekend.

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Nightmare on the High Street

Thu, 26 Jun 2008 11:55:57 GMT

Retail sales figures released last week may have been surprisingly upbeat, so much so that the Bank of England’s Monetary Policy Committee members were left scratching their heads in bewilderment as to why consumers had shopped ‘til they dropped in May to produce the biggest monthly increase in retail sales since 1986. But Cityblogger notes that it’s a different story today. The FTSE100 is down more than 30 points, despite the US Federal Reserve leaving rates on hold yesterday evening at 2 per cent, and it’s all due to worries about retail and the continuing consumer slowdown.

Investors are jittery after DSG unveiled a painful slump in profits this morning due to large impairment charges relating to a reshuffle of its Italian arm. The company behind electrical goods brands Currys, Dixons and PC World, revealed that underlying profits for the full year to 3 May 2008 fell a whopping 30 per cent to £205.3m (from £295.1m in 2007) this year. And these figures, while admittedly in line with expectations, came despite an 8 per cent hike in sales compared to (£8.5bn) those posted last year (£7.9bn in 2007). Slightly worryingly, DSG had little to say on the subject of current trading besides pointing out that conditions are “challenging” and that the economic backdrop “continues to be difficult”. All of which concerned some analysts.

Ramona Tipnis, analyst at Oriel Securities, reiterated her sell recommendation on the shares. She believes that while they trade on a relatively undemanding price earnings multiple for 2009, there could more gloom in the offing. “There is more downside to come given the deteriorating trading outlook,” she says. However, Nick Coulter at broker Numis is slightly more optimistic, raising his recommendation from reduce to hold, although he also cut his target price on the shares from 52p to 45p and admits that pressure will continue to fall on the high street and electrical goods in particular.

DSG shares fell just under one per cent but later recovered, rising just over 1 per cent, while shares in Marks & Spencer, Tesco, Carphone Warehouse and Next dipped in sympathy.

Elsewhere in the markets, the banks continue to receive a pounding. Shares in Barclays, in which the Qatari Investment Fund – also an investor in Sainsbury’s – is rumoured to be buying a 10 per cent stake, were down by nearly 7 per cent this lunchtime. This is despite favourable noises from investors about Barclays’ decision to strengthen its balance sheet through a £4.5bn share issue.

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ScS: Investors to lose out

Mon, 23 Jun 2008 10:55:43 GMT

Cityblogger regrets the situation that shareholders of ScS Upholstery - yet another victim of the credit crunch – find themselves in.

Now admittedly, Cityblogger isn’t a keen shopper and particularly dislikes the type of retail offerings where one is pounced on and wrestled to the ground by four salesmen as soon as one steps foot over the threshold. He used to avoid Courts like the plague for that same reason and he similarly shuns the delights of DFS.

But he has reserved a small smattering of respect for ScS, given that, until now at least, it has weathered the slings and arrows of outrageous misfortune that did for its competitors, Courts, Furnitureland and now Sleep Depot. But, alas, now its fate too hangs in the balance.

Shares in the furniture retailer were suspended this morning at 6.5p following news that ScS investors are likely to lose most of what's left of their investment if a deal with an unknown purchaser goes through. ScS says that it has received an approach to acquire its entire share capital, but that as so much additional working capital funding is needed the deal may lead to “only negligible value being attributed to the shares”. Oh dear.

One of ScS’s problems is that furniture suppliers and retailers are finding it impossible to get credit insurance and this is placing a strain on working capital needs. The shares are already down by 97 per cent in the last 12 months, plagued by a number of profit warnings this year.

Meanwhile, elsewhere in the City, as the oil price continues to be a burden on business, City insiders are scoffing at Gordon Brown’s clumsy attempts over the weekend to get OPEC to increase productivity. “PM – in your dreams!” comments David Buik at BGC Partners. “Geo-political problems will continue to underwrite the price of oil.” Certainly, a decision by Saudi Arabia to pump more oil has still failed to push prices down. In fact Stena Line told Radio 4 this morning that it has decided to slow down its Ireland ferries and add 16 minutes to the journey to save on fuel!

On the bright side, the FTSE100 is up 0.3 per cent this morning at 5640 boosted by the rising oil price and rumours that Lloyds TSB is circling German bank Dresdner. However, according to Tom Hougaard, chief market strategist at City Index, the markets’ performance this week may rest on the interest rate decision by the US Federal Reserve, expected later in the week

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Merv prophesies more misery

Thu, 19 Jun 2008 10:11:06 GMT

The sun may be shining, and the birds may be singing their hearts out – Cityblogger is a closet fan of Bill Oddie’s SpringWatch as, strangely enough, so is Tiddles – but all in the garden is far from rosy. For the powers that be continue to spoil our fledgling summer with their tales of doom.

In his annual speech at Mansion House last night, Bank of England Governor Mervyn King prophesied more misery to come. Tucking into the Lord Mayor’s banquet for bankers and merchants of the City of London (Cityblogger doubts very much that gruel was on the menu there..), Our Merv said UK workers’ take home pay will “stagnate” and admitted that “some families will find it particularly difficult.” But he warned that pay must remain low in the face of rising inflation and oil prices, or risk a “prolonged period of sluggish output and high unemployment.” He also said that once the credit crunch was over, mortgage lending would get back to normal but insisted that “the era of cheap mortgage finance” was over.

This latest dollop of cheer came after minutes released yesterday from the Bank of England Monetary Policy Committee’s (MPC) last meeting showed that some members had been in favour of an interest rate hike, but had ultimately decided against it.

What’s more, today HBOS has come out and predicted that house prices will fall by 9 per cent this year, as well as announcing further writedowns on its investments in housebuilding companies. While trading at the bank was described as “satisfactory”, shares in the company behind Halifax and Bank of Scotland dipped by 5 per cent in the morning’s trade. Banking shares have been hard hit altogether today, with the FTSE100 on the slide once more. However, James Hamilton, analyst at broker Numis, maintains his buy recommendation on HBOS’ shares, believing that they will outperform their peers. The shares have fallen so hard this year that perhaps the only way is up!

At least some good news is forthcoming from the Office of National Statistics, which says retail sales in May rose by 3.5 per cent, above forecasts! Although this is said to be puzzling the boffins at the MPC.

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Return of the Inflation Beast

Tue, 17 Jun 2008 10:02:47 GMT

As a humble scribe himself, Cityblogger feels for Mervyn King, the Governor of the Bank of England, who has been forced to write a letter to Gordon Brown this morning to explain why inflation hit the dizzy heights of 3.3 per cent in May.

It isn’t always easy to find inspiration, but Our Merv certainly had plenty to write about. According to data from the Office of National Statistics, the Consumer Prices Index annual inflation, which the Government uses as its inflation yard stick, rose from 3.0 per cent in April to 3.3 per cent last month. And according to the rules, when inflation goes beyond 2 per cent Our Merv must write to Gordy and explain why.

The ONS says a range of issues were contributing factors, including the spike in meat and vegetable prices, higher gas and electricity bills compared to the same period last year and the soaring price of crude oil. The Retail Prices Index inflation also rose to 4.3 per cent in May from 4.2 per cent in April.

And in his letter Our Merv lays the blame squarely on the 60 per cent hike in world agricultural prices, the 80 per cent increase in oil prices and the 160 per cent jump in wholesale gas prices compared with May 2007, which has affected countries all over the world. What’s more, Merv reckons things will get worse before they get better. He expects inflation to top 4 per cent in the second half of this year, depending on fluctuations in gas and electricity prices. And he believes high inflation will continue well into 2009. Let’s hope he has plenty more pithy phrases up his sleeve as the Governor admits that this will probably be the first of “a sequence of open letters over the next year or so”. Oh dear!

Gloomy stuff. Cityblogger has already begun harvesting money-off vouchers from Great Aunt Vi’s copy of OK magazine, braving the beaming photos of Wayne and Coleen Rooney, in anticipation of another tough year. On the bright side, the ONS reckons that the UK inflation rate is at least lower than the European Union’s provisional figure of 3.6 per cent.

But it looks increasingly likely now that anybody hoping for another interest rate cut soon can whistle for it. “I suspect that UK markets can forget about any decrease in base rates for the time being,” warns David Buik at BGC Partners. “It seems a question now of when do they go up? Perhaps October, unless the UK economy shows signs of falling off the cliff. Even the CBI is worried about the UK’s economy and suspects conditions may deteriorate even further – as bad as it was in 1992.”

And as if to add insult to injury, the oil price hit $140 a barrel yesterday, although it has since dropped back. At least the FTSE100 is in buoyant mood this morning, up over 70 points to 5865, albeit still below 6,000, and boosted by a banking sector rally and bid speculation in the mining sector.

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Shell: a storm in a petrol pump

Fri, 13 Jun 2008 10:56:32 GMT

Shell is top of the headlines today as tanker drivers, employed by external companies, who deliver fuel to its petrol stations walk out in a four day strike over pay. Union officials complain that the hauliers are paid the same as they were in the 1990s and that Shell should intervene to avert a crisis and inject some of the fat profits it has made from soaring oil prices.

But as Cityblogger cruised past a BP garage this morning, all was quiet on the western front, with no motorists in fisticuffs over the petrol pumps. Similarly, despite all the fuss, Royal Dutch Shell's shares look pretty resilient, down only one per cent.

Elsewhere in the City, the Financial Services Authority is trying to stamp out the short-selling of shares which are subject to rights issues. And in a further snub to Microsoft as takeover talks between the two companies formally ended, Yahoo has got into bed with Google in an online ad deal. Ah...the course of geek love never did run smooth...

Cityblogger wishes you a relaxing weekend.

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House of Pain

Wed, 11 Jun 2008 10:57:49 GMT

If you’re unlucky enough still to hold shares in a house builder then Cityblogger sends you his deepest sympathy. For if the past year’s shocking share price performances weren't punishment enough, during the last 24 hours the market has turned up the heat on the longsuffering sector.

House builders are on the back foot after a series of broker downgrades sent their shares nose diving. On Tuesday the shares experienced their single biggest drop since the credit crunch kicked in. The fall came after broker Dresdner Kleinwort withdrew its target price on Barratt Development’s shares, and in an unusually candid note to investors expressed concerns over its ability to manage its short-term debt and the likelihood of potential cashflow problems. Barratt’s shares shed 24 per cent of their value yesterday and are down another 25 per cent today – down 93 per cent over a year. Ouch! Peer company’s shares were also hit, with Persimmon shares down nearly 10 per cent on Tuesday.

And more pain is on the menu today, after analysts at Merrill Lynch got stuck in too, downgrading recommendations on individual stocks and comparing the current crisis to the housing market recession in the 1990s. Unsurprisingly Barratt’s shares are down another 25 per cent today, while Persimmon’s are off a further 7 per cent. Investors have been waiting for Barratt to follow RBS’ example and do a rights issue, but it could be difficult to achieve now. And talk is that a debt for equity swap could be the more likely option.

Attempting to call the bottom of the sector is like building one’s house on the sandy ground. “Like many of its sector peers, Persimmon’s share price has been in decline since early 2007, so has been something of a leading indicator for the weakness in UK property prices,” points out David Jones, chief market strategist at IG Index. “On this basis, many would assume that whenever these property stocks do bottom out, it will still be in the face of gloomy newsflow for the housing market. But at the moment, with a slew of negative data coming out almost daily for UK property and the likes of Persimmon still in sharp decline, many investors seem to be resolutely avoiding trying to catch this particular falling knife.”

Wise words! Cityblogger wouldn’t touch the sector with the proverbial pole right now.

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Tesco feels the pinch

Tue, 10 Jun 2008 09:50:24 GMT

Every little helps, so Tesco’s mantra goes, but it wasn't quite enough in the first quarter, so it would appear. Just like its shoppers, it seems that even the intergalactic supermarket monster is feeling the pinch of the dip in consumer spending, as rising energy and mortgage costs bite.

While its first quarter trading statement released today looks, on the face of it, pretty respectable, with group sales for the thirteen weeks to 24^th May up by 13.7 per cent, Tesco shares opened down almost 3 per cent at 391.4p today.

To be fair, the wider market is also down this morning, with the FTSE100 unfortunately once again below the all-important 6,000 mark to 5,870 following fears about the spectre of higher interest rates. But while chief executive Terry Leahy told investors that Tesco made “solid progress” in the UK and “coped well” with the “more cautious mood on non-food spending”, some analysts are concerned that the like-for-like sales growth of 3.5 per cent (excluding petrol) Tesco achieved during the first quarter is lower than that initially seen in the first five weeks of the period (4 per cent) and that reported by Morrison’s last week (7 per cent).

However, analysts at Citigroup say this apparent slowdown is “slightly deceptive”. Analyst James Anstead at the investment bank points out that like-for-likes in the first five weeks of the quarter were helped by easy comparisons from the fuel contamination crisis during the same period last year. So Mr Anstead argues that investors should view any weakness in the shares today – ie. a dip below £4 - as a buying opportunity. The shares are already down 11 per cent over the past 12 months.

Meanwhile, worryingly, Tom Hougaard, chief market strategist at City Index, reckons that the gyrations of the FTSE100 remind him “more and more” of the bear market in 2001 and 2002, during which there were sharp and sudden rallies, which would then disappear the following morning when the market would dip once again.

Oh dear! It's tin hat time once again.

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City panel to police Merv

Fri, 06 Jun 2008 10:32:10 GMT

Few City people will have raised eyebrows at the decision to keep interest rates flat at 5 per cent yesterday. In fact, it’s an announcement from Chancellor Alistair Darling yesterday that’s piqued the Square Mile’s curiosity. Mervyn King, the governor of the Bank of England, otherwise known as Uncle Merv, must be feeling a mite hard done by at news the government is to install a city panel to watch over him and ensure another Northern Rock fiasco isn’t waiting in the wings. Reports say that while Merv isn’t too chuffed with Mr Darling’s plan - one City insider describes it as “a complete outrage” - the pay off is that the Chancellor is expected to back Merv’s favourite contender for deputy governor – Charles Bean.

Meanwhile the oil price hike overnight has boosted oil stocks and thankfully helped push the FTSE 100 back over the all important 6,000 mark after it lost headway this week. And there are fears that more rights issues could be in the offing, and possibly from the ailing house building sector. Something investors won’t welcome with open arms!

Cityblogger wishes you a good weekend.

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B&Q: Blame it on the weather

Wed, 04 Jun 2008 10:01:05 GMT

B&Q has taken some of Cityblogger’s best adult years and he has little to show for it but a leaky radiator, a hole in the wall and a wobbly bookshelf in the lounge.

So it is with mixed feelings that he notes today’s first quarter trading statement from its parent company Kingfisher. Group like-for-like sales at the retailer, which also owns Castorama in France, were down 4.1 per cent in the 13 weeks ending 3 May, and were particularly abysmal in the UK, where like-for-likes slipped by 7.9 per cent.

Kingfisher blames poor spring weather, compared to the mini heat wave we experienced this time last year, and the early Easter for keeping away customers. If in doubt, retailers are wont to blame their woes on God and his elements which, of course, can’t argue back.

But while the shares are down by just over 2 per cent today, analysts say the retailer’s figures are actually more cheery than they anticipated. Like-for-like sales, while ostensibly grim, were in line with expectations and gross margins healthier than expected. And chief executive Ian Cheshire says the performance of its revamped B&Q stores and new products has actually improved, while he is busy trying to turn around the company’s Chinese operation.

On the down side, however, Nick Coulter, analyst at broker Numis, sees more gloom to come courtesy of the housing market. “While beating low profit expectations we think the macro, and particularly the recent deterioration in the UK housing market, has yet to feed through,” he says, maintaining his reduce recommendation on the shares.

Meanwhile the FTSE100 is blood red and worryingly dipped below the 6,000 mark to 5964 this morning. House building stocks are down, hit by downgrades from investment bank UBS, which predicts house prices will dip by as much as 20 per cent. While financial stocks continue their daily struggle, not helped by rumours of a possible rights issue from Lehman Brothers, and energy company shares have also hit the skids due to the falling oil price.

Batten down the hatches!

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Trouble in the BB House

Mon, 02 Jun 2008 09:34:25 GMT

Cityblogger has fond memories of the old adverts featuring the rather stuffy Mr Bradford and Mr Bingley with their smart bowler hats and umbrellas. He wonders what these two stout fellows would make of the nightmare poor investors woke up to this morning – a 27 per cent slump in the share price. Ouch!

The good news is that mighty private equity player Texas Pacific Group is taking a 23 per stake in Bradford, investing £179m in the ailing mortgage lender. However, the bad news is that it also issued a profits warning this morning, admitting that trading conditions have deteriorated and customer mortgage arrears are growing. Margins also declined by 18 basis points in the four months to the end of April. What’s more, the company has awkwardly tinkered with its rights issue, and is now raising £400m of new equity instead of £300m, as previously announced last month. But now £179m will come from TPG and £258m from other investors. And chief executive Steve Crawshaw is also stepping down due to heart problems, with chairman Rod Kent is stepping up to the plate, becoming executive chairman.

Analysts at Numis Securities were unimpressed and are reviewing their target price on the shares. “In our view the recent U-turn made surrounding funding issues further deteriorated an already weak brand,” complains James Hamilton, banking analyst at the broker.

And with the shares down by 85 per cent over the past 12 months to 64.25p, City commentators are now calling for Messieurs Bradford & Bingley to hang up their hats altogether. “A speedy purchase of B&B is required to avoid embarrassment,” argues David Buik at BGC Partners. “One product banks do not have any role in financial society going forward. They are too small to cope with the whips and scorns of time. Bradford & Bingley should be taken over by a large European, US or UK bank. A UK bank seems unlikely bed-partner because of the OFT.”

But it’s possible that TPG’s shiny new 23 per cent stake, while good news for now, could be off-putting to other potential suitors.

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