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Investors Corner
The Market
Leading shares ended modestly higher on Friday, but below their
midday highs after a fairly choppy afternoon session, with Wall
Street’s slightly mixed and volatile early performance
curbing the bargain hunting rally in London. At the week close,
the FTSE 100 index was 28.2 points firmer at 6,170.4 points,
below its midday peak of 6,189.9 points, but above a late afternoon
low of 6,130.5.
All the broader FTSE indices were also higher, with the techMARK
100 index standing out – bouncing 126.9 points higher to
2,594.73 as Nasdaq put recent sharp falls behind it. Volume
was solid for a Friday, with 1.779 billion shares changing hands
in 120,177 transactions.
UK blue chips moved higher in early trades in the morning, rallying
after recent depressing performances thanks to a spot of bargain
hunting in hard-pressed telecom, media, and technology issues
despite the overnight plunge on Wall Street – made in reaction
to the after-hours warnings by Gateway and Altera. However,
a lack of corporate news or any major UK economic data meant
leading shares just drifted higher in London, with the mark-up
in “new economy” issues countered by profit taking
in “old economy” stocks.
By London’s close, the DJIA was 20.10 points firmer at
10,434.59 points, still below an early peak, but the Nasdaq
index was up 85.74 points at 2,685.67points, far from its best
levels of the session so far. Technology issues provided the
bulk of the FTSE 100 gainers, lifted by bargain-hunting after
sharp falls following the Altera and Gateway warnings in the
US, and helped by Nasdaq’s early recovery. Misys was the
top performing FTSE 100 gainer today, adding 88 pence at 585
pence as ABN Amro reiterated its “add” stance and
raised its revenue estimates for the group following a close-season
round-up.
Meanwhile, ARM Holdings was up 75 pence to 515 pence as long-term
bear Nomura moved its stance to “buy” from “sell”,
viewing the stock as oversold and seeing a fair target at 550
pence. Logica was also a strong feature, adding 160 at 1,561
as a number of brokers reacted positively to the upbeat meeting
with analysts. HSBC upped the stock to “add” from
“hold” with a 1,550 pence price target, both Deutsche
Bank and Nomura raised it to a “buy”, and Commerzbank
moved its stance to “hold” from “sell”.
Market heavyweight Vodafone Group continued to see good demand,
12-3/4 pence higher at 254 pence after Goldman Sachs reiterated
its “recommended list” status on the stock, greeting
the deal with Cap Gemini positively. Energis gained 45-1/2 pence
at 495 pence, helped by news that it has appointed Bill Trent,
a former partner at management consultants McKinsey as its group
finance director designate with immediate effect.
Elsewhere, South African Breweries put on a speculative spurt
in the afternoon, adding 46 pence at 471 pence as talk circulated
that the group could look to merge with Interbrew – the
group which floated on the Belgian stock market. Interbrew shares
saw a solid debut performance, having been priced at the bottom
end of the market range. The Belgian group earlier this year
acquired the brewing arms of both Bass and Whitbread.
Bank of Scotland, up 19-1/2 pence to 680 pence also found support
on fresh speculative interest as the market awaits the outcome
of the bank’s tentative merger talks with Abbey National
– Abbey shares fell 1-1/2 pence to 1,103-1/2 pence. The
Daily Telegraph recycled talk that Barclays is considering merging
with Abbey National if the former building society’s tie-up
talks with Bank of Scotland fail. Barclays shares fell 2 pence
to 1,975 pence on profit taking after the previous day’s
sharp gains in reaction to news of an upgrade in rating by Goldman
Sachs.
Other “old economy” stocks dominated among the blue
chip fallers as investors moved to take profits following the
good recent run for defensive issues. AstraZeneca suffered on
reports that CSFB has cut its earnings estimates for the group
by between 2-5 pct for the next five years, keeping a “hold”
rating on the stock. AstraZeneca shares lost 140 at 3,460. Other
blue chip drug groups lost out on profit taking after recent
rallies, with Glaxo Wellcome falling 103 to 1,954, merger partner
SmithKline Beecham shedding 33-1/2 pence at 886 pence, Nycomed
Amersham losing 19-1/2 pence at 537-1/2 pence, and Shire Pharmaceuticals
falling 37 pence to 1,074 pence.
Cadbury Schweppes fell back 16-1/2 at 475 after JP Morgan cut
its rating on the stock to “market perform” from “buy”
following the previous day’s trading upbeat and expansion
news. J. Sainsbury also met the profit takers following its
strong performance earlier this week on heightened Homebase
unit sale prospects – Sainsbury shares topped the FTSE
100 fallers list, falling 22-3/4 pence to 392 pence. Fellow
supermarket blue chip Tesco – lifted by an upbeat trading
statement – lost 10-1/2 pence at 272-1/2 pence.
Claims Direct was an “old economy” exception, recovered
further from last week’s profits warning and this week’s
disappointing maiden results, adding 19-1/2 pence at 132-1/2
pence as a second director took current weaknesses as an opportunity
to buy. Otherwise, the tech bargain hunting provided the majority
of blue chip gainers: Orchestream took the top slot, rallying
41-1/2 pence to 240 pence ahead of its third quarter earnings
due next week. Surfcontrol also found support, firming 127-1/2
pence at 865 pence, while Geo Interactive gained 90 pence at
615 pence – helped by positive intra-day comment from Lehman
Brothers.
Railtrack
A company certainly making the news is Railtrack, the rail network
operator. A series of crashes that have characterised the UK’s
rail network have demonstrated the abysmal state of the network.
Despite this the group’s chairman on an upbeat note boasted
that during the first six months of the financial year, investment
by Railtrack in the rail infrastructure increased by 36 per
cent to a record level of £1.2 billion. In additions,
he said that safety indicators demonstrated improved performance
throughout the network with signals passed at danger down by
30 per cent when compared with the same period last year.
The company has continued to make significant investments to
improve the safety of the rail network. The £370 million
programme to fit 11,000 signals with the Train Protection Warning
System has begun and is expected to complete the core programme
throughout the network by December 2002, a year earlier than
originally demanded by the rail safety regulators. Railtrack’s
Safety and Standards Directorate is planned to be transferred
to an independent subsidiary company, in line with the previously
agreed recommendation of the Rowland review.
The company has made a major contribution to the inquiry into
the Ladbroke Grove accident led by Lord Cullen and the joint
inquiry into Ladbroke Grove and Southall led by Professor Uff
and Lord Cullen. These reports have not yet been published.
However, early indications suggest that the primary cause of
the Hatfield derailment was a broken rail, which was caused
by the defect known as gauge corner cracking.
Railtrack has accepted responsibility for the accident and is
investigating why the track at Hatfield had been allowed to
deteriorate into such a poor condition, and why no speed restriction
was imposed pending re-railing. As a result of the derailment
at Hatfield, Railtrack has undertaken a major examination of
track across the network involving some 3,000 sites. The completion
of this programme should lead to enhanced track quality, fewer
broken rails and a safer network. Most routes should be almost
back to normal by Christmas with the remainder following early
in the new year.
Overall performance for the year will fall substantially short
of the Regulator’s 7.8 per cent target for improvement,
even before the impact of Hatfield. The Regulator has said that
his intention is not to impose a fine for under performance
in the financial year 2000/01. However, he is proposing to re-base
the benchmarks in the performance regime for the next control
period on the assumption that Railtrack makes up this years
shortfall.
Given the importance of the industry working together, the company
has decided not to pursue a judicial appeal against the level
of fine imposed by the Regulator for under-performance of 2.7
per cent against the performance improvement target of 12.7
per cent in 1999/2000. An accrual of £10 million to cover
the fine was made in the 1999/2000 accounts.
Meanwhile, Section 1 of the Channel Tunnel Rail Link is proceeding
on schedule with 46 per cent of the project complete. The scheme
is expected to carry its first revenue earning traffic in October
2003. Railtrack is completing its due diligence exercise on
section 2 of the project. The option to acquire expires on 1
July 2003. The board expects to take a decision on whether to
exercise the option following the outcome of the regulatory
review process.
The first phase of the East Coast Main Line project, which includes
the completion of major works at Leeds and Doncaster South,
is now 51 per cent finished. Phase 1 of the project is expected
to be completed on time in 2002. The Thameslink 2000 project
is currently subject to a public inquiry, which is now expected
to run until February 2001. It is not currently known if this
will delay the start of construction.
The re-franchising process currently underway will define the
agenda for new infrastructure provision. Project delivery groups
are being established with the shadow Strategic Rail Authority
to evaluate emerging requirements. The current workload is focused
on the development of the East Coast Main Line and the Midland
Main Line and for the recently announced Chiltern and New Southern
Railway replacement franchisees.
The 2000/01 full year profits will be materially impacted by
the actions taken by Railtrack following the Hatfield accident.
Estimates are broad and at an early stage, but payments to the
train operating companies under the performance regime combined
with the impact on the depreciation charge of additional re-railing
could be of the order of £250 million and will be treated
as an exceptional item.
The government’s 10-year transport plan combined with some
essential changes to the final regulatory settlement should
provide a platform, from which Railtrack can grow and develop
its business.
Railtrack has been pressured to make new board and senior appointments
to strengthen the role of engineering at the board level and
to enhance the company’s customer focus. Executive director
Richard Middleton, a chartered engineer will become technical
director, while Andrew McNaughton has taken up the post of chief
engineer and will also be a member of the group committee and
the operations committee.
Railtrack should offer investors long-term growth, but given
the network’s miserable state and potential liabilities
it represents a high-risk investment.
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