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Investors Corner
The Market
UK Telecom and financial stocks rose on optimism that US interest
rates will fall further on Friday. Colt Telecom and Royal Bank
of Scotland led the advances as the FTSE 100 Index rose 12.5
points to 6198. Nine shares advanced for every 10 that declined
in the FTSE All Share Index, which added 5.4 points to 2976.13.
The FTSE 350 Telecommunications services index rose 113.4 points
as falling interest rates in the US are expected to ease the
repayment burden on the highly indebted telcos. BT gained 9
pence to 622 pence, while Vodafone, rose 2.1 pence to 241.5
pence.
Viridian
Viridian, the electricity, telecoms and support services group,
announced that the liberalisation of energy markets in Ireland
is creating growth opportunities for the group. In northern
Ireland, the electricity wholesale market is now open to 32
per cent of customer demand and this will increase to 35 per
cent by April 2001. Energia, its independent second tier supplier,
has established a leading position in the market, with over
60 per cent market share. In the Republic of Ireland, Energia
was the first independent supplier to enter the electricity
market and has already secured contracts for electricity supply
with a number of major industrial customers.
Huntstown, Viridian’s generation project based in Dublin,
is making good progress and was placed first in the process
for gas capacity allocation overseen by the regulator in the
Republic. The first phase of the project, a 340MW CCGT plant,
is planned to be operational by the winter of 2002.
Viridian’s Open + Direct also performed well in the six
months to 30 September; operating profits pre-goodwill increased
to £7.2 million from £5.4 million. In consumer financial
services, growth was strong in retail credit lending; in addition
two further insurance intermediaries, Footman James & Co
and SG Cathcart & Co, were acquired for an aggregate consideration
of £8 million.
Meanwhile, Viridian’s nevada tele.com, its telecommunications
and internet joint venture with Energis, completed the acquisition
of Stentor, a Dublin-based telecommunications group for IR£47.5
million in August. The group’s share of operating losses
pre-goodwill for nevada for the period was £1.3 million.
Its expectation remains that nevada will not be profitable in
the short-term.
Viridian is demonstrating that outside the energy sector its
other businesses have grown organically and through acquisition
and are well positioned for further growth.
Scottish & Southern Energy
Scottish and Southern Energy’s gas business now has nearly
one million customers and will break even this year in line
with its five-year business model. The group is further planning
to transfer its gas customers onto its Customer Service system
in spring next year. This will give further cost reductions
next year.
On the telecoms front, Scottish and Southern Energy’s £45
million investment to install over 2,000kms of fibre optic cable
along its electricity network is ahead of schedule and is planned
to be completed three months early. It now expects to meet its
sales target for the first phase of this investment this year
with turnover in excess of £30 million. Customers in the
specialist business user market have already been acquired including
two university consortia in the south-east of England.
Scottish and Southern Energy has further strengthened its e-commerce
strategy with the announcement on 7 November of an alliance
with BTopenworld, BT’s new retail internet portal. It also
remains on target with the development of phase 2 with mortgages
available early next year. Other financial products including
term assurance and ISAs, from a range of product providers,
will follow during 2001 to create a virtual financial supermarket.
Simple2 will be promoted actively to over 1 million business
customers, 300,000 from Scottish and Southern Energy’s
customer base and another 750,000 through a link with BT who
will promote stakeholder pensions to its business customers
through its wide range of routes to market.
Growth is expected to come from both internal investment and
selective mergers and acquisitions. The group is also expected
to continue to look at new market opportunities, to achieve
leverage from its existing customer base, and as appropriate
support this with investment.
Cable & Wireless
Cable & Wireless (C&W), the telecommunications operator,
reported that for the six months to 30 September, revenue from
its continuing operations increased by 15 per cent. However,
group revenue declined slightly reflecting the disposal of Cable
& Wireless Communications ConsumerCo and Cable & Wireless
HKT during the period. Cable & Wireless Global (its wholly
owned operations in US, Europe and Japan) increased revenue
by 20 per cent and grew ahead of the market, with IP revenue
up by 60 per cent - benefiting in particular from the contribution
of its fast growing European IP businesses.
C&W reported that it has established a number of key strategic
relationships with companies such as Compaq, Microsoft, Nokia,
Nortel and Baltimore Technologies to deliver a comprehensive
range of IP solutions to its current and new business customers.
Meanwhile, IP services, developed for the carrier and ISP market,
contributed significantly to overall revenue growth in the period.
The revenue growth was achieved despite the expected falling
prices for connectivity, which have taken place, particularly
in the US. Cable & Wireless Global Markets’ customers
are increasingly demanding IP solutions for their business needs.
IP revenues generated by Partner Services have increased principally
as a result of the growth in Global.net and IP telemedia products.
Global.net connects ISPs around the world to C&Ws’
backbone and web content distributor. IP telemedia has been
particularly successful in Japan where a 45 per cent market
share has been achieved. Demand for data services continues
to grow strongly, particularly for data network services, such
as frame relay, ATM and voice over frame relay. Growth in the
volume of basic data circuits has been more modest, increasing
by 14 per cent, as customers migrate to managed data solutions.
Analysts remain convinced that C&W’s financial strength
and focused strategy gives it a unique competitive advantage.
Safeway
Safeway, the supermarket group, announced that the success of
its new commercial strategy continued to drive strong sales
growth during the first half. Total sales grew by eight per
cent to £4,739 million and sales growth in like-for-like
stores was five per cent, including volume growth of 10.6 per
cent. A further 2.6 per cent was contributed by net new space
and 0.4 per cent from an Easter trading period this year.
Safeway reported that a major programme of range and quality
upgrades in key categories is progressing well. Fresh prepared
foods - such as pizzas, sandwiches and parts of its ready meals
range - are being given particular attention. ‘The Best’,
a new range of premium quality products which it launched nine
months ago, has been very successful and by the end of November
will extend to some 180 lines with more to come. This programme
will be accelerated in the year ahead.
Store investment is also beginning to focus on creating an exciting
store environment in which the four pillars of Safeway’s
strategy can fully come through and achieve maximum impact.
Work has been progressing for several months in design, layout,
equipment specification and product assortment with several
important trials already taking place in-store. Major projects
to create step-change improvements to its offer in ancillary
departments such as restaurants, dry cleaning and photoprocessing
are also underway.
New full concept trial stores at St Katherine’s Dock, London
and Woking, Surrey, which are planned to open in the near future,
will take all this work a stage closer to full implementation.
A hypermarket format test store is also planned for the first
half of next year. Safeway’s ambition is to convert 25
existing superstores to hypermarkets over the next two years
with the potential to extend a further 45.
Safeway has turned around and is now laying the foundations
for strong growth in its second half and beyond. This next phase
is on schedule and is expected to deliver the new formats, design
innovations, ranges and services which, coupled with the faultless
execution of the four pillars of its strategy, are key to achieving
Safeway’s full potential.
Sainsbury
Sainsbury, the supermarkets, hypermarkets and DIY group, reported
that for the half-year to October 14, sales in its UK Supermarkets
increased by five per cent to £7.3 billion. Like-for-like
sales growth in the first half was 2.4 per cent, an encouraging
improvement on the negative like-for-like figures reported in
the first half last year.
The second quarter was below the first at 1.8 per cent, which
directly compares with 2.2 per cent for Q1. Underlying food
deflation eased during the second quarter, averaging -0.2 per
cent and volume growth was held back in the short term by the
removal of inappropriate non-food items and extension and refurbishment
activity in a number of important trading stores.
Operating profit in the first half, before charging e-commerce
costs of £16.4 million, was £255.5 million, a decline
of 23.1 per cent, in line with expectations. The operating margin
was 3.5 per cent. This was primarily as a result of higher operating
costs which arose from a combination of differential inflation
and investment in customer service and availability.
During the first half Sainsbury opened seven stores totalling
191,700 sq ft of sales area plus five Local stores. In the second
half it plans to open a further six stores totalling 92,600
sq ft. It also extended 13 stores adding 148,600 sq ft of sales
area and is on track to complete this year’s programme
of 35 extensions adding 441,000 sq ft of sales area.
Sainsbury’s Bank reported an operating profit of £8.5
million for the half year, an improvement of £7.6 million
on 1999/00. This included a credit of £3.5 million relating
to VAT. These results reflected increased focus on the more
profitable loans business together with the launch of a number
of new products including the new Visa card and the national
launch of its car scheme, Drive.
Sainsbury’s DIY Business, Homebase reported that sales
growth in the first half was 10.8 per cent. Like-for-like sales
growth was 8.3 per cent and adjusting for Easter was 5.6 per
cent. Homebase profits before e-commerce costs were up a healthy
7.3 per cent. The Homebase strategic review is now progressing
well, although taking longer than originally expected, and Saisbury
is in advanced negotiations regarding the sale of the business.
Despite the sales growth rates reported, analysts remain concerned
that Sainsbury is far from catching Tesco and is also lagging
its other rivals in like-for-like sales growth.
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