23 - 29 November 2000

Investors Corner

The Market
London shares pared their gains at the close of trade characterised by a lack of direction, with investors keeping to the sidelines as the political void – provoked by the absence of a US President – persisted throughout the week.
The FTSE 100 index closed the week 9.7 points higher at 6,440.1, well above its 6,403.4 low and off a mid-afternoon high at 6,483.3. But the broader indices remained mixed, with the techMARK dipping back into negative territory, losing 0.93 points at 3,146.62. Volume was 1.361 billion shares in 103,161 trades, swollen by hefty trade in Vodafone.
At the close of trading, blue chips continued to perform somewhat erratically, taking their lead from Wall Street’s roller-coaster performance. ‘Old economy’ issues were featured largely on the list of FTSE 100 fallers, notably mining stocks: Billiton led the fallers – losing 12-1/4 pence at 246 pence – while Anglo American shrugged off earlier advice to ‘accumulate’ by heavyweight broker Merrill Lynch, with a 4,350 price target.
Rio Tinto lost 14 pence at 1,048 pence on news its subsidiary has agreed to buy Exxon’s coal mine operation in New South Wales for 134 million Australian Dollars.
Railtrack continued to plummet after the shocking and definitive resignation of chief executive Gerald Corbett. He is to be replaced by finance director Steven Marshall – the rail operator’s shares lost 36 pence at 995pence. Elsewhere, financials were in focus after Dresdner Kleinwort Benson published a note on the sector, pointing out that UK commercial banks are no longer safe havens, given rising IT costs, increased competition and declining revenue growth.
Alliance & Leicester – downgraded to “sell” from a “reduce” by the brokerage – lost 2-1/2 pence at 639-1/2pence, while Royal Bank of Scotland lost 35 pence at 1,490 prnvr. Insurance stocks, however, continued to gain after Commerzbank’s highlighting of the sector’s attractions in its weekly strategy note.
The German-based bank believes the European insurance sector offers some key attractions which cannot be found elsewhere – namely exposure to the growth potential of European savings, a cyclical upturn in non-life insurance which is unrelated to the economy and a beneficiary of e-commerce development. Prudential rose 49 pence to 1,087 pence, CGNU gained 25 pence to 1,067 pence, and Royal Sun added 9 pence to 518 pence.
Meanwhile, selected technology and telecom stocks continued to attract some fresh interest. Spirent still led the FTSE 100 index risers, up 55 pence or 9.39 per cent at 641 pence, boosted by a raft of positive comment on £1.1 billion Hekimian Laboratories buy and fund raising moves. Sema Group was close behind, up 19 pence at 695 pence, as UBS Warburg turned “strong buyer” from the previous “hold”, with a maintained price target of £11.
Colt Telecom gained 45 pence at 1,750 pence and Logica firmed 29 pence to 1,810 pence – while Dixons added 7-1/4 pence at 224-3/4 as bid speculation continued to cling to Freeserve, in whom the group holds an 80 pct stake. Freeserve shares were off earlier highs, but still 13 pence higher at 161 pence.
Baltimore fell back however, losing 14-1/2 pence at 430 pence, while Dimension Data slid back 9 pence to 595 pence, CMG shed 25 pence at 1099 pence, Arm Holdings losing 22 pence at 638 pence and Bookham lost 45 pence at 1,425 pence – as investors remained jittery over upcoming results following the dramatic fall seen in US semiconductor issues after Merrill Lynch cut its ratings.

Boots
Boots, the health and beauty retailer and manufacturer, reported interim pre-tax profit before exceptional items of £271.3 million, up from £265.2 million last time, and above the £265-270 million market range. The retailer also said it is targeting further cost savings of £100 million across the group to be delivered by the end of 2001/02, with the savings to be over and above the Boots The Chemists target previously announced.
But despite the top of the range figures, several brokers moved to trim their year to March profit estimates for Boots – largely to account for the group’s planned investment in the Granada Media health channel. The general feeling towards the stock appears to be divided, with the Boots bulls pointing out that the stock is trading at a substantial discount to its peers despite forecasts for similar earnings growth. The bears, however, feel that Boots long-term strategy remains unclear – especially as its international operations have put in less than a sparkling performance.
Deutsche Bank is understood to be upbeat on the near-term performance of Boots, rating the stock as an outright “buy”. JP Morgan was also a fan, reiterating its long-term “buy” advice – though current year pre-exceptional pre-tax profit forecasts have been cut back to £569 million from the previous £587 million. Meanwhile, Goldman Sachs is understood to have repeated its “market outperform” stance and 600 pence price target on Boots – feeling that the stock remains undervalued at current levels. It too, however, has trimmed back its current year pretax estimate for the retailer – moving back to £595 million from the previous £607 million.
WestLB Panmure’s well-respected retail team raised its target price for Boots to 600 pence from 575pence, and repeated an “outperform” stance on the stock.
But there are still some players who feel Boots’
upside is limited, particularly in an increasingly competitive retail market. UBS Warburg has reduced its target for Boots to 525 pence from 575 and reiterated a “hold” rating in the wake of the results. Dresdner Kleinwort Benson also repeated “hold” ratings on Boots, with ABN Amro keeping an “overvalued” stance.
Boots’ chairman announced that the company is now engaged in a process of transition to take advantage of the growing interest in health and beauty which when combined with demographic changes offers considerable potential for growth both in the UK and internationally. Boots is also taking further steps to reduce the cost base in order to release funds to meet its growth plans.
Boots has a group-wide strategic cost management programme in progress and is exploring cross business unit cost saving opportunities as well as rigorously examining group costs. As a first step this group programme is expected to deliver savings of £100 million by the end of next financial year over and above the Boots The Chemists target already announced.
Boots is also planning to introduce a new all employee share scheme later in the financial year and as a consequence no additional shares have been purchased
for the Quest. It is the group’s intention to utilise any available shares held in the Quest within the new scheme.
Boots has announced that the programme to reduce its cost base is on target. The group has focused on improving the efficiency of store backshop operations. Employee numbers (FTEs) have been reduced by over one thousand since March 2000 leading to an improvement in the operating cost to sales ratio for the half year of 1.3 percentage points and an absolute reduction in operating costs of £11 million. Boots’ target is to reduce this ratio by one percentage point per year over four years commencing 2000/01. Boots has joined the World-wide Retail Exchange and trials in internet auctions should identify further cost saving opportunities.
Four edge-of-town (EOT) stores were opened in the half year and they are performing well, while the group is also on target to open 20-30 new EOT stores before the financial year end. Revenue investment was increased as Boots expanded store numbers in Thailand and prepared for launch in Taiwan.
In August Boots announced the proposed sale of its retail business in the Netherlands to Etos, part of Royal Ahold. From 6 November, all stores and staff were transfered to its ownership and a range of Boots brands will be distributed through approximately 400 Etos stores. In addition to the operating loss, an exceptional loss of £20 million arising from the disposal has been reflected in the half year results.
Boots Opticians’ profit was impacted by media spend that was significantly increased by two new TV advertising campaigns and a number of significant investments designed to further differentiate the offer and achieve higher levels of customer satisfaction.
Investments have included the following product innovations: Advanced Lightstream Technology (Prismiq) has been installed in over 80 stores, offering better quality lenses, available for collection at the time most convenient for the customer. A further 70 stores will be converted by the end of the year, allowing all stores (including satellite stores) to offer the service.
Contact lens sales have been boosted by the launch of Near & Far varifocal contact lenses and extended wear contact lenses. In four stores Boots has now implemented a new trading format which significantly improves the store environment and the product range. Initial results were encouraging.
In Boots’ Halfords, sales have increased by 5.4 per cent to £254.5million, 5.2 per cent on a like for like basis. The 5.2 per cent like for like sales growth excludes the new format stores that are already outperforming the remainder of the chain. Boots own brand merchandise accounts for over 47 per cent of total sales. This figure is not expected to increase significantly as Halfords implements its strategy of appealing more to customers with specialist interests through range extensions in the new format stores.
In Boots Properties, 20 properties were sold with proceeds of £24.2 million, realising book profits of £6.8 million. This compares to the same number of properties sold last year, which resulted in a profit of £2.8 million. Total expenditure on property development is expected to increase in the second half but will not reach previous years’ levels. Contracts have been exchanged on 11 new edge-of-town sites for Boots The Chemists, while a further 30 sites are under active negotiation.
According to the CEO, the pace of change is accelerating across the group. This is now a business in transition as Boots drives for a higher level of performance overall. The first half outcome at Boots The Chemists reflects the near term impact of its strategy, with profits growing faster than sales. Gross margins have been maintained and Boots remains confident about the results for the year as a whole.”