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Leading UK shares closed down on Friday, but off earlier lows, as investors' concerns over inflation, heightened by the escalating price of crude oil, dominated the pre-weekend session. The FTSE 100 index closed the week 88.5 points lower at 6,600.7, above its low of the day at 6,561.1, but well below an early peak of 6,704.2. The broader FTSE indices were largely lower, with the Small Cap index holding a firm 2.6 points higher. Volume was a hefty 1.621 billion shares in 108,334 trades, still swollen by strong trading in Granada Compass and Invensys and active trading in market heavyweight Vodafone.
UK blue chips firmed slightly in early trade after a mixed showing overnight on Wall Street as a recovery in technology issues after gains on Nasdaq were countered by weakness in "old economy" stocks. Earlier gains were reversed midmorning, as the positive impact of Nasdaq's rally began to run out of steam on a lack of follow-through buying; London shares fell back further at midday as the market nervously awaited Wall Street's opening, in search of fresh direction. An early downturn on Nasdaq in the afternoon disappointed many players, who had been hoping that the previous day's gains signalled that a new uptrend was in sight.
Granada Compass topped the FTSE 100 fallers in the wake of a slew of estimate downgrades after a presentation by the group. Analysts pointed out that changes in accounting policies proposed by the group will have a short term impact on forecasts, although longer term the move is seen as positive, being a more "open" stance. Morgan Stanley, Goldman Sachs and ABN Amro are among those brokers known to have cut estimates, while house broker HSBC Securities initiated coverage on the merged group with an "add" rating on Friday and a 920 pence price target. Granada Compass shares dropped 66 pence to 711 pence.
Unilever
Unilever, the foods, detergents and personal care products group, reported a nine per cent decline in pre-tax profits to £1.24 billion for the half-year to 30 June. In Europe, operating margins improved strongly but sales revenue was held back by lower vegetable oil prices. Profits moved ahead, driven by continuing strong gross margins in western Europe and improvement in the underlying profitability in Central and eastern Europe in the second quarter. A faster attrition of Unilever's tail brands and the non-consumer goods businesses has been well managed with profitability being raised.
Spreads volumes in western Europe, although flat in the second quarter, significantly improved over the first quarter, with lower vegetable oil prices leading to strong margins, but reducing sales. The approval of Unilever's cholesterol reducing spread by the European authorities will allow its introduction during the second half of the year. The introduction of the new Bertolli range drove growth in olive oil, more than reversing the decline seen in the first quarter.
Meanwhile, Unilever's culinary business continued to make good progress with Stir-it-up, Sizzle & Stir, and Five Brothers sauces, while Amora Maille contributed for the first time. Tea based beverages grew strongly driven by Lipton ready-to-drink, PG-tips in the UK and Tchae in France. Volume growth in ice cream was driven by ice cream multipacks, desserts, and the roll out of Solero Shots. Frozen foods volumes grew two per cent in the quarter, helped by Quattro Stelle, a new range of quality meals.
Sales from Unilever's leading brands within home and personal care increased, particularly in fabric conditioners, household-care, skincare and deodorants. Half year sales from Dove rose 18 per cent. Profitability in central and eastern Europe has improved, and the rate of sales decline has slowed compared to the first quarter. Progress has been made in reshaping the portfolio. In Turkey, Unilever regained share leadership in the laundry market in the second quarter, but the competitive pressures in Poland remain, in both laundry and spreads. In North America, Unilever's acquisitions added to an improved underlying performance in foods. Home and personal care made steady progress. Sales in the quarter rose more than six per cent, with a first-time contribution from SlimFast and Ben & Jerry's. Investment in advertising and promotions behind the foods business was stepped up significantly. Margins in foods advanced strongly in the quarter and the half year, reflecting the benefits of restructuring, cost effectiveness and lower commodity prices.
Also in North America, ice cream, tea based beverages and culinary products all showed good growth driven by innovation: Breyers Parlour, Popsicle Scribblers and Pokemon novelties in ice cream, Sizzle & Stir, Just2Good in culinary and Lipton Cold Brew in tea drove an underlying volume growth in foods of nearly three per cent in the quarter, and over two per cent for the half year. In spreads, market shares increased, partly as a result of the group's leadership in the cholesterol lowering segment. In Unilever's North American home and personal care business, sales were flat for the quarter due to competitors activities and trade destocking. In laundry, volume was up but revenue flat as a result of competitive pricing pressure. However, personal wash and deodorants showed excellent growth, where innovations with Dove and Caress are leading to further share gains.
In Africa and the Middle East, Unilever sustained stable sales but lower operating profit reflecting marketing investment and lower vegetable oil prices. Sales were stable despite political and economic difficulties in several countries. Meanwhile in Asia and the Pacific region, strong sales growth continued and marketing support increased. These territories showed healthy and broad based sales and profit growth.
Unilever's chairman argued that the group is continuing to make good progress with its "Path to Growth" strategy. It is focusing on its leading brands and addressing the under-performing businesses as demonstrated through the forthcoming sale of its European bakery business.
Despite the optimism shown by Unilever's chairman, most analysts issued an "underperform" rating and reiterated a 12-month share price target of 380 pence implying downside of 13.5 per cent from current levels. In a research report, Lehman Brothers concluded that Unilever shares have run ahead of themselves. The broker pointed out that the crux of Unilever's "Path to Growth" restructuring initiatives and integration of the Bestfoods acquisition is the reinvigoration of the group's top line growth, which the firm is targeting at 5.8 per cent by 2004.
However, Lehman added that it is forecasting growth of 3.5 per cent by that period, based on: the group's poor product mix, where 41 per cent of corporate sales are in categories with organic growth rates of 0-2.5 per cent; the accelerating decline of the group's tail brands; and a marketing spend that remains below expenditure by the best of its peers.
Lehman also noted that, at present, Unilever's earnings are driven solely by cost savings - a fact it feels will make for volatility and, consequently, poor visibility. The broker added that in this light, it believes the PLC stock should trade on an estimated 2001 EBITDA of eight times, in line with where Danone traded in 1996/97 when it embarked on its rationalisation programme - especially given the execution risk associated with Unilever's strategy. However, Lehman added, on an EV/EBITDA basis, Unilever shares are currently trading on an estimated 2001 multiple of 8.5 times, which places the stock on a 3.5 per cent discount to Nestle (ex-L'Oreal). The broker said it feels that this is unjustified given the sustainability of Nestle's earnings.
TI Group
TI Group, the seals, automotive and aerospace parts group, announced that its John Crane business, serving both the process and marine industries, continued to strengthen its market position and secure valuable new business. Although revenue was down, due largely to weak process markets and delivery phasing in the marine business, John Crane overall is well positioned to continue to gain market share and to resume growth as the process industry recovers, as anticipated, next year. TI Group Automotive Systems delivered strong growth, particularly in Europe and North America. Following the acquisition of Walbro in June 1999, the integration of which is proceeding successfully, the business has won important new contracts to supply fully integrated fuel storage and delivery systems. It is anticipated that the aerospace business will sustain a strong performance relative to the cycle and resume year-on-year profit growth in 2001.
The exceptional charge in the interim results for the six months to 30 June against operating profit of £2 million represents integration investment relating to Walbro and Marwal. The remaining £9 million expenditure announced at the time of these acquisitions will be incurred in the second half. Cash flow from operations was again strong at £190.5 million. After capital investment, free cash flow was £145.7 million, 35 per cent ahead of last year. Excluding exceptional items this covered, as in previous years, the group's net interest, tax and dividend payments.
TI Group launched two Eurobond Issues. £150 million of unsecured fixed rate bonds due 2010 were issued on 27 June with a coupon rate of 7.875 per cent. Euro300 million of unsecured fixed rate bonds due 2005 were issued on 4 July with a coupon rate of 6.375 per cent. Both issues have been admitted to the Official List of the London Stock Exchange and are rated A3 and BBB+ by Moody's and Standard & Poor's respectively. The Eurobonds have extended the maturity of £330 million of debt outstanding to between 5 and 10 years.
Going forward, TI Group Specialty Polymer Products looks well placed in an expanding £4 billion addressable market to achieve a high level of growth with continued margin improvement.
TI Group Automotive Systems: For the remainder of the year, the automotive markets in North America and Europe are expected to remain strong, with Latin America and Asia Pacific set to improve further. The acquisitions made over the last two years have increased TI Group Automotive Systems' addressable markets by over £4 billion to £7 billion, and broadened its system capability, creating significant growth opportunities.
TI's Dowty is set to benefit from the UK Ministry of Defence's decision to lease four Boeing C-17 Globemaster III aircraft and to order 25 of the new Airbus A400M to meet its requirement for heavy lift aircraft. Dowty is on a wide range of key growth programmes including regional jets and military aircraft, and has a strong after-market position.
Its spread of activities, in a £3 billion addressable market, will reduce its exposure to softening civil deliveries at Boeing and, going forward, enable it to sustain a strong performance relative to the cycle with growth returning in 2001.
In order to take full advantage of the opportunities that are now presenting themselves with the emergence of web technology, the group is continuing to progress a series of significant initiatives both on the "buy-side" and the "sell-side" of its supply chain. TI Group has started the second half with healthy order books and the acquisitions are making an increasing contribution to performance.
Please note that the value of investments, and income (if any) yeilded 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.
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