30 November - 6 December 2000

Investors Corner

The Market
Leading shares closed the week in firm territory but off earlier highs as investors’ sentiment was buoyed by a strong post-Thanksgiving session on Wall Street, with the Nasdaq ignoring Sema’s profits alert earlier in the day. Investors continued to hold onto selected Technology, Telecom and Media issues, though the earlier rout witnessed in the IT services sector was strongly in evidence, as the fall-out from Sema Group’s shock profits warning continued to weigh.
Insurance stocks moved onto the leader-board in late trades, after German insurance giant Allianz confirmed its interest in acquiring a UK company with a big life insurance business. On Friday, the FTSE 100 index closed up 40.3points at 6,327.6, shy of its recent 6,359.3 high and well above its earlier 6,237.2 low. All the broader indices posted falls, though the techMARK bounced back from earlier lows to rest 102.9 points lower.
On Wall Street, the DJIA was up 95.18 points at 10,493.36 and Nasdaq added 114.37 at 2,869.48. Volume was 1.393 billion shares in 113,391 trades, swollen by massive trading in Sema after the morning’s alert – with some 84.16 million shares changing hands. CGNU – mooted as a potential target - was 25 pence higher at 1076 pence, while Royal Sun & Alliance put on strong gains, adding 27 pence at 552 pence.
Selected tech issues remained well bid at close, with Baltimore pushing up to the top spot on the list of blue chip risers - adding 24-1/2 pence at 377 pence - and ARM Holdings gained 16 pence at 568 pence, as Goldman Sachs highlighted the attractions of the European chip makers. Invensys also pushed higher, gaining 6-1/2 pence at 166 pence.
Telecoms issues lost some of their former lustre, but remained strongly sought after, encouraged by Nasdaq’s opening bounce. Market heavyweight Vodafone saw gains of 6 pence to 256 pence, with hopes rising of early news on the planned Eircell buy.
The dramatic tumble in Sema Group continued to dominate the market, with the IT services group seeing its share price almost halve as swingeing downgrades were put in place after the full-year profits warning. Sema warned that the 2000 profits will fall short of market expectations - largely due to problems in the second half with the recently-acquired billing software company, LHS.
It also warned that 2001 like-for-like revenue growth will be 12 per cent, below current market forecasts - its shares dropped 274 pence at 346 pence. HSBC Securities did a volte face, moving to “reduce” from the previous “buy”, while Nomura moved back to “hold” from long-term buy. Brokers moved quickly to slash their full year estimates, with early indications showing that the 2000 consensus pre-tax estimate is likely to come down to £105 million - well below the £132 million consensus seen before the profits alert.
Competitors CMG and Logica were marked down in sympathy, falling 121 pence to 925 pence and 108 pence to 1,530 pence respectively, while Sage Group got caught in the panic, falling 11 pence at 408 pence. Oil issues came under pressure mid-afternoon as investors cashed in on the previous day’s mild gains, driven by continuing sabre-rattling in the Middle East and potential disruption to Iraqi exports.
BP Amoco was 7-1/2 pence off at 598 pence, BG Group lost 2-1/2 pence at 284-1/2 pence and Shell was 1-1/2 pence off at 576-1/2 pence. However, BAT, shaken by the Florida Supreme Court ruling, rallied 23 pence to 515 pence, while second liner Gallaher advanced 16 pence at 447 pence. GUS gained 27 pence to 536 pence ahead of next week’s interims.
Real features among the Mid Cap risers were few and far between: IQE extended its gains, rising 37-1/2 pence at 340 pence - still boosted by Lehamn Brothers “outperform” advice and 380 pence 12-month price target. TI Group and Smiths Industries – up 17-1/2 pence to 404 pence and 28 pence to 797 pence respectively - attracted fresh support as tracker funds began to move in ahead of their upcoming merger and move into the FTSE 100 index.
But second line tech stocks, which had posted small advances in early trade, remained unwanted despite Nasdaq’s bounce. Infobank fell 62-1/2 pence to 345 pence, Royalblue shed 137-1/2 pence at 1067-1/2 pence, Filtronic shed 40 pence to 425 pence, Scoot.com fell 8 pence to 70 pence, FI Group slid 21 pence to 329 pence, and Computacentre shares lost 26-1/2 pence at 308-1/2 pence. Intec Telecom Systems remained unwanted, 199 pence lower at 521 pence, after the shares returned to trading following its £172.3 million Computer Generation buy and £180 million placing and open offer.
Elsewhere, Claims Direct shed 40-1/2pence to 143-1/2 pence, despite predicting that first half profits will come in ahead of expectations, with the market upset by news of an exceptional charge in the second half. Delta moved into the spotlight, up 18 at 154-1/2 pence, on the back of recent buying by the chairman, chief executive, finance director and non-executives.
Smaller company shares finished the day and the week in negative territory, hit by a raft of profit warnings and as investors interest remained tightly focused on the roller-coaster ride in blue chip and Mid Cap issues. The FTSE Smaller Cap index ended down two points at 3,265.6, but well above its 3,269.8 day’s low, and off a high of 3,269.8. Profit alerts took their toll on selected Smaller Cap issues.
Ship builder Cammell Laird posted dramatic declines, crashing nearly 37 per cent as its future was cast into doubt after Italian customer Costa Crociere applied for arbitration on its £51 million luxury cruise liner refit contract. The move stunned Cammell Laird management and could put 1,000 jobs at the company’s Merseyside shipbuilding yard at risk. Costa Crociere is understood to be unhappy at the standard of work carried out, and is said to be concerned over Cammell’s ability to meet certain deadlines. Cammell Laird shares sunk 22-1/2 pence to close at 39 pence.

Associated British Foods
Associated British Foods, the food producer, reported an 18 per cent decline in pre-tax profits notwithstanding a three per cent increase in turnover for the year to 16 September. The UK agricultural sector continued to suffer from the worst economic conditions for many years. As the largest operator in the UK agribusiness sector Associated British Foods has not been immune from these pressures. Against this background, and an environment of flat, or declining, prices and margins in food retailing and manufacturing, to have recorded this increase in operating profit shows the resilience of its operations.
Despite the impact of the strong pound and the general depression affecting UK farming, like-for-like profits in Associated British Foods’ agricultural processing businesses were marginally ahead of the previous year. The principal factors contributing to this increase were improved returns from UK flour milling and the company’s sugar operations in China.
In ingredients and oils, both SPI Polyols and Rohm Enzyme delivered excellent results and Abitec, in the UK and US, also produced further like-for-like double digit growth. In grocery, although ongoing rationalisation costs and continued price pressures reduced the contribution from UK baking, other companies, notably Ryvita and Westmill Foods, significantly increased underlying profits.
Primark, Associated British Foods’ retail textile business, achieved a one per cent increase in operating profit and continued to gain increased recognition and share in its highly competitive marketplace. There was a welcome improvement in the contribution from the group’s Australasian companies driven by significantly improved profits in milling and baking and a contraction in the level of spend on new IT systems.
The group registered exceptional charges of £130 million which allowed for restructuring by disposal or closure of manufacturing and processing activities in this country, the US and the Far East. The major portion of this charge relates to the write down of redundant or over-valued fixed assets. The related cash costs will not be material to the group and completion of the restructuring programme should result in improved profitability and the release of surplus capital.
Associated British Foods is taking major steps to improve the focus of its traditional businesses. The group is giving equally urgent attention to the development of newer, less commoditised, technologies in the provision of food and healthcare ingredients. It has increased the pace of its investment in these sectors and the rate of development will be accelerated by acquisitions. These will be targeted in areas which will bring wider but related formulation and process skills, significant market presence and able management.
So far Associated British Foods has done a good job of selling dull businesses at high prices, and improving many of its continuing activities. But it will take a sizeable, and successful, acquisition to get the share price moving. The CEO is clearly doing his best, while maintaining the company’s reputation for prudence. But the timing of acquisitions can never be predicted and he appears frustrated that some lengthy negotiations have yet to yield deals.
Meanwhile he still needs to tackle British Sugar, which has strong cash flow but limited prospects within the UK, and the much thornier problem of milling and baking, which cannot have made money last year with bread prices as low as 19p a loaf. Without any deals, profits will rise only by perhaps 15m this year, leaving the shares on a p/e of around 12, looking cheap but waiting for news.
Lehman Brothers reiterated their “buy” recommendation. Lehman has also raised its price target on the food producer to 500 pence from 450 pence. With Associated British Foods emphasising that it is switching into acquisition mode and continuing to re-position its portfolio towards higher growth areas, Lehman continue to believe that the stock warrants a re-rating from its current discount to its European agri-processing peers.