25 - 31 January 2001

Investors Corner

The Market
London shares ended almost flat on Friday, just fractionally weaker after falling back in the afternoon following a firm morning session, pressurised by a cautious performance from Wall Street.
With the US Dow Jones Industrial Average (DJIA) depressed by a profit warning from Home Depot, and the Nasdaq index seeing its early gains eroded, by the London close, the FTSE 100 index was 0.6 points easier at 6,209.3. However, the broader FTSE indices were all firmer, with the techMARK 100 pushing 61.01 points higher to 2,787.65. Volume was solid, with 2.545 billion shares changing hands in 143,495 transactions, bolstered by strong trading in market heavyweight Vodafone (512 million shares).
UK blue chips recorded good early gains on Friday, with the FTSE 100 index reaching its peak for the day at 8.17am, fuelled by a strong performance overnight on Wall Street. UK technology issues were particularly bolstered by the strong showing from the Nasdaq composite index overnight, which was backed up some good after-hours performances from a number of big hitters, including US software giant Microsoft, Sun Microsystems and Nortel.
However, as the morning session progressed the early FTSE 100 peak was consistently eroded, with a lack of follow through interest due to the absence of much major corporate news. The morning’s UK data also had little impact.
December provisional M4 money supply was up 0.7 per cent on a seasonally-adjusted basis from November and 8.2 per cent higher than in the same month a year earlier – consensus was for M4 to have risen 0.5 per cent month-on-month and 8.1 per cent year-on-year. December provisional M4 lending rose £8.2 billion, against forecasts of a £7 billion increase.
London shares drifted further back by midday, awaiting Wall Street’s restart for fresh direction, although futures markets pointed to early gains in New York – dependent on some US data. The US trade deficit for goods and services in November was bang in-line with market estimates, narrowing to a seasonally adjusted $33 billion deficit from a revised $33.6 billion trade gap in October. But despite this, the DJIA took a tumble from the start, dropping back in response to the Home Depot Q4 earnings warning, although the Nasdaq index managed to find some gains.
Wall Street was also not helped by the release of a weak preliminary University of Michigan consumer sentiment index, which slid to 93.6 in January from 98.4 in December, a level that had not been seen since October 1998 when Russia devalued the rouble. The FTSE 100 index fell back in reaction to the DJIA caution, hitting its worst level of the day at 3.20pm, although as the leading US index came off its early lows, the UK blue chip index also managed a rally back towards opening levels. By London’s close, the DJIA was 95.97 points lower at 10,582.31, while the Nasdaq composite index slipped 0.80 points at 2,767.69.
Technology issues provided the main underlying support for the FTSE 100 index all session. Autonomy held the top slot on the FTSE 100 gainers list, up 190 pence at 2,375 pence after recent good newsflow, while Energis gained 35 pence at 578pence, Misys firmed 33 pence at 670 pence, and Spirent added 29 pence at 610 pence.
Dimension Data, up 25 pence at 490 pence was also lifted by news of an upgrade in rating by HSBC Securities to “add” from “hold”. Marconi put on 40 pence at 785 pence as Morgan Stanley repeated its “outperform” rating, although the broker cut its price target to 900 pence from 1,250 pence.
Lehman Brothers publication of its list of “10 Uncommon Value Euro Stocks for 2001” provided a lift to the four UK stocks included on it. Logica – rated “strong buy” by Lehman with a £30 price target – ended off highs but still up 25 pence at 1,825 pence, Colt Telecom – also rated “strong buy” – gained 100 pence at 1,770 pence, Reckitt Benckiser – a “strong buy” too – firmed 35 pence at 838 pence, and Hilton Group – upgraded to “buy” from “market perform” with a 270 pence price target – ahead 9 pence at 235 pence, were the UK names on the brokers key list.
Elsewhere, Pearson gained 44 at 1,700 as Deutsche Bank upped its stance to “buy” from “market perform” with a 1,910 pence target. Canary Wharf also benefited from an upgrade, with Schroder Salomon upping its stance to “buy” from “outperform” with a 607 pence target price – its shares gained 17 pence at 489 pence. Hays attracted support as ABN Amro repeated its “buy” rating, adding 13 pence at 378 pence.
But other “old economy” stocks dominated on the blue chip fallers list. ICI was the biggest FTSE 100 faller, with chemical issues affected by poor results overnight from US peers, such as Union Carbide. Schroder Salomon’s downgrade of ICI to “underperform” from “neutral” earlier this week also hit analysts desks. ICI shares lost 32 pence at 470 pence.
Kingfisher tumbled further in the afternoon, losing 22 pence at 430 in sympathy with the fresh profit warning from US peer Home Depot, and after this week’s disappointing trading update from the UK retailer.
Shire Pharmaceutical ran in to profit taking after this week’s broker comment-inspired gains, shedding 62 at 1,214, with news ignored that the UK National Institute for Clinical Excellence had cleared the group’s Alzheimer’s treatment for NHS use. AstraZeneca, off 110 pence at 3,000 pence also saw profit-taking after this week’s rally.

Scottish & Newcastle
Scottish & Newcastle (S&N), the brewing and pubs group, announced that its key financial objective remains the achievement of upper quartile total shareholder returns relative to a peer group of major competitors. S&N’s total beer business has increased its contribution to the group by nearly 40 per cent for the six months to 29 October. This includes a very satisfactory initial contribution from the recently acquired Kronenbourg business.
In market conditions that were more difficult than expected, Scottish Courage did well to grow profits by four per cent and make further market share gains. Since the market conditions prevailing in these six months were not representative of future trends, the company stated that it would expect higher rates of earnings growth in the longer term.
In the International Beer business, good progress has been made with the re-negotiation of existing purchasing contracts to exploit the economies of scale now available across S&N’s wider European business. The company remains confident that the synergy benefits of £25 million identified at the time of the Kronenbourg transaction will be delivered.
Scottish Courage announced a four-year programme of initiatives and investment that will increase its competitiveness and allow it to maintain its strong record of building brands and market share and growing earnings. The programme covers the re-organisation of all on trade operations, systems development and a programme to significantly lower stock levels and working capital across the business.
Over the full course of the programme there will be a reduction of 1,300 jobs. Over the four-year period it is anticipated that total employment in Scottish Courage (including Waverley) will fall by some 1,300 jobs from the current 6,500 to 5,200. The exceptional costs are expected to reach £116 million. When the programme is completed, it is anticipated that annual savings of £46 million will be achieved.
S&N is also carrying out a unit by unit review of its total Retail estate. This review will result in the disposal of all units that fail to meet defined growth criteria. S&N’s future estate will be predominantly focused on:- Chef & Brewer and family dining; Premier Lodge; High quality traditional pubs; branded pubs and bars.
As a result of this review, within Scottish & Newcastle Retail, 920 of the 2,373 managed houses will be sold (740) or transferred to leased outlets (180) in order to focus the business on high turnover, high quality, high margin outlets in four strong market sectors. The book value of the pubs to be disposed or transferred is £566 million. In the 12 months to November 2000 their EBIT was £47 million and EBITDA £68 million. In total these pubs have annual beer sales of 320,000 barrels.
Restaurants and Premier Lodge has 451 outlets. The main development focus of this business will be on Chef & Brewer and Premier Lodge both of which provide the opportunity for good development returns and like for like sales growth. The number of Chef & Brewer outlets is expected to rise from 86 today to 170 by April 2004.
Market forecasts indicate several years of further growth in the budget accommodation market. The rebranded and refurbished Premier Lodges have tangible product advantages in themselves as well as offering higher quality adjoining restaurants. At the end of April 2001 there are expected to be 115 Premier Lodges with 6,500 rooms. The scale and quality of this business is delivering growing occupancy and revenue. A further 38 lodges, with 4,700 rooms, will be opened by April 2004.
In branded bars, Bar 38 is a proven success and further outlets will be developed. Other concepts such as Via Fossa and Baja Beach Club are achieving very high turnover and outlet profitability and there will be selective further developments. Across this business the number of development brands will be reduced. The pubs business will have 742 unbranded pubs. Some of these outlets will be among those to be branded as T & J Bernard or Barras.
S&N announced that it has received approaches in respect of any managed houses that it is bringing to market and it is anticipated that the disposal process will be completed during the next six months. S&N Pub Enterprises will operate the houses that are transferred to tenancies though the intention is to divest the property interest to a financial institution. Growth will be delivered through targeted capital expenditure. The average spend will be around £55 million per year over the next three years. In addition there will be acquisitions to develop Premier Lodges and their associated Chef & Brewer outlets.
In view of this restructuring news analysts said that this dashed any lingering hopes that Scottish & Newcastle, which last year acquired Kronenbourg of France, would abandon its policy of vertical integration and concentrate on growing its international brewing interests. But things have been brought to a head. The group has never previously spelt out in such detail where it expects growth to come in its pubs. If the management fails to meet its targets, there will be little choice but to follow in the footsteps of Bass and Whitbread and sell the entire estate. The City has yet to be persuaded to agree with S&N’s strategy.