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The Market
Leading shares closed lower on Friday, although well off their worst levels, as tracker funds sold baskets of FTSE 100 stocks to reinvest in Vodafone AirTouch, which will be re-weighted following the Mannesmann merger. With poor performances from Wall Street and the heavyweight banking sector adding to the downside pressure, the FTSE 100 closed 86.5 points lower at 6,193.3, well off its intraday low of 6,127.4. At that time the Dow Jones Industrial Average was down 52 points and the Nasdaq was also down 53.
Elsewhere things were much brighter. The FTSE 250 surged 103.6 points to 6,147.4 following a strong performance from its tech constituents and the FTSE Small Cap ended 23.3 better at 3,160.3. Market turnover hit 3.3 billion by 4.34 pm, with Vodafone AirTouch accounting 1.5 billion or 33 per cent of that total. The merged Vodafone AirTouch-Mannesmann will be included in the FTSE International indices for the first time on Monday. The stock, which saw frantic trading, in the last 30 minutes of trading closed 8-3/4 pence higher at 351-3/4 as tracker funds piled in.
Vodafone's volume and price gain came largely at the expense of liquid banking sector which was aggressively sold-off.
The sector also had to contend with disappointing figure from Lloyds TSB. Lloyds shares tumbled 60-1/2, or 8.81 per cent, to 626 after the high street banking shocked investors with full year results below expectations and a warning that competition from new entrants is beginning to bite.
The misery was compounded by what most pundits considered to be a 'too little too late' Internet strategy. Lloyds' warning of intense competition and comments from ratings agency Standard & Poor's that UK bank ratings could come under downward pressure sent shock waves round the rest of the sector. Halifax fell 32-1/2 to 446, Woolwich eased 18-3/4 to 276-1/4 and Abbey National fell 40 to 644. Bank of Scotland fell 63 to 614.
Other liquid stocks to suffer from the Vodafone-related sell-off were BP Amoco, 8 lower at 479-1/2 and SmithKline Beecham, down 8 at 710. Cable & Wireless, up 64-1/2 at 1,358, was among the bright spots, boosted by hopes that its C&W HKT unit could be subject to a bid battle. Earlier today, Cable & Wireless received an approach from Pacific Century CyberWorks announcing the proposal of a merger with Cable & Wireless HKT, in which C&W has a 54 per cent holding. Currently C&W HKT is in talks with Singapore Telecommunications concerning a possible merger of equals between C&W HKT and SingTel. Analysts said the battle for HKT, which has emerged as part of C&W's strategic focus on its global data and internet business, is fast turning C&W itself into a takeover target with Deutsche Telekom seen as a likely predator.
Kingfisher, up 46 at 477-1/2, closed the session as the best performing FTSE 100 stock as the bargain hunters moved in. On Wednesday Kingfisher shares, which have under-performed the UK market by 26 per cent since the start of the year, slid to their lowest levels since Jan 1998. According to dealers this fact sparked the bargain hunting although there was also talk of corporate activity.
ICI
ICI, the speciality chemicals and paints group, reported a 72 per cent in pre-tax profits to £503 million on a turnover of £8.45 billion for the year to 31 December. These results were rather impressive as the chemicals group achieved a milestone in its transformation into a speciality chemicals producer. Particularly encouraging was the much stronger performance in core Speciality Products and Paints businesses, especially the fourth quarter where sales and profits improved markedly. In the final quarter almost every business unit and region within ICI's core businesses showed year on year improvement.
In Speciality Products, the improvement seen through 1999 continued with a fourth quarter increase in profits of 18 per cent over last year. ICI's National Starch, Quest, and Uniqema all improved full year profits with overall margins increasing to 12.2 per cent. For National Starch this was the 30th consecutive year of profit increases while Quest achieved record annual profits and margins. Paints achieved excellent double-digit profit growth in 1999 and ICI's North American business continued to improve significantly.
In the UK, ICI had another record year. Industrial Chemicals remained in loss despite the significant cost reductions as prevailing market conditions remained tough and sterling strengthened against the euro. ICI's Klea business moved into profit during the year and the losses in Chlor Chemicals and PTA in Pakistan were lower in the second half.
Meanwhile, the net debt was reduced from £4.2 billion to £2.3 billion, and the gross proceeds from the divestment programme exceed £6 billion. In the fourth quarter the chemicals group also completed the divestments of its Acrylics and Fluoropolymer businesses. This, together with the improved performance, raised interest cover in the quarter to over three times.
Wassall
Wassall, the diversified industrials group, reported an impressive 581 per cent increase in pre-tax profits to £170.9 million for the year to 31 December. The appraised value of the group's investment portfolio, calculated in accordance with British Venture Capital Association guidelines, increased by 17 per cent over the course of the year to 400p per share, largely as a result of investment realisations during the period. This valuation includes Thorn Lighting, as a recently acquired investment, at cost.
Wassall sold Antler and DAP in July and August 1999 respectively for a total of £215.5 million, resulting in a gain of £121.9 million over book value. In February 1999, an approach was made to BICC with a view to making an offer for that company and in August an offer was made for the Allied Carpets Group. Neither acquisition was ultimately completed, although a profit of £13.6 million, after costs, was achieved on the subsequent disposal of shares held in these companies.
Throughout 1999, Thorn has responded well to the implementation of Wassall's strategic plan and this is reflected in the results for the year. Implementing the strategic plan will involve reorganisation expenditure of £30 million and, to date, £14.6 million of this has been charged as an exceptional item. Market conditions for Thorn products varied from territory to territory. Germany was weak throughout the year but, apart from this and some early weakness in the UK, Europe was generally strong.
The year ended well with final quarter sales across Europe as a whole 5 per cent ahead of 1998. A sharp increase in volume in China underpinned year on year growth in Thorn Lighting Asia while the Australasian business also performed well. The benefits of the action taken throughout Thorn Lighting since its acquisition are already evident and more will come in 2000. The company continues to perform in line with expectations and the outlook is very encouraging.
The general economic climate in the major markets served by Wassall Asia Pacific stabilised and is improving in some areas. Turnover increased during the year on the back of growth in the African region and Australia. Sales in some territories, however, continued to be weak due to over-capacity and sluggish demand. While recovery is still at an early stage, prospects for the company are better than they have been for some time.
The trading profit from continuing operations, before exceptional costs, increased from £20.2 million in 1998 to £41.1 million in 1999 following a full year's contribution from Thorn Lighting, which was only part of the group for approximately three months in 1998. This more than offset a reduced contribution from other continuing operations.
PizzaExpress
PizzaExpress, the pizza and pasta restaurant group, announced that during the six months to 31 December existing restaurants increased sales by 2 per cent on a like for like basis; a 1 per cent increase in the first quarter and a 3 per cent increase in the second. These increases were due to a greater number of customers and higher average spend per head. The management of labour allowed the group to limit the margin reduction to 0.2 per cent.
PizzaExpress has tested new menu items in 60 restaurants and the successful dishes, including four new pizzas, will be launched nationally in March. All of these new menu items have been developed using existing equipment and suppliers and require minimal operational changes whilst giving customers more choice. In the International Pizza Restaurants division, like for like sales in the five franchised restaurants that have been open more than 18 months were up 30 per cent. Franchise opening fees and royalty income of £0.3 million produced a franchising trading profit of £0.1 million. Sales in company-owned restaurant in Tokyo averaged £35,000 per week in the seven weeks of trading in the period. This restaurant consistently served twice as many customers per week as the UK pizza restaurant average.
PizzaExpress announced more rapid expansion when the existing restaurants have demonstrated profitable growth. Since the period end trade has continued to be positive with like for like sales in our UK and Ireland pizza restaurants increasing 5 per cent despite closing restaurants on New Years Eve and opening later than usual on New Years Day. Sales at recent openings in Cork, High Holborn, Greenwich, adjacent to Royal Festival Hall and Curtain Road in the City of London have also been particularly strong.
Please note that the value of investments, and income (if any) yielded by them, may fall as well as rise, and you may not recover the full amount of your original investment. Past performance is not necessarily a guide to the future.
James Dimech DeBono is a qualified accountant with a strong academic background in quantitative financial economics and a keen interest in investment management. He can be contacted by e-mail: JamesDebono@CompuServe.com
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