15 - 21March 2001

Investors Corner

The Market
Leading London shares plunged in late trading in the last session of the week, knocked by Wall Street’s free-fall following stronger-than-expected US data for February. The figures, which showed a sharp increase in both non-farm payrolls and hourly earnings, suggest the Federal Reserve may only cut interest rates by a mere 25 basis points at the next FOMC meeting on 20 March.
At the close of trade, the FTSE 100 Index was 85.9 points lower at 5,917.3, only just above an intra-day low at 5,908.9, having been in negative territory all day. All the broader FTSE indices remained weak, with the techMark putting on the worst performance, shedding 73.59 points in reaction to Nasdaq’s early plunge. Volume was solid, with 1.06 billion shares changing hands in 98,518 transactions. By the close of trade in London, the DJIA had reversed all of the previous day’s strong gains in reaction to the disappointing US data, shedding around 180 points to 10,677 – while the Nasdaq composite index dropped 98 points to 2,069.
Wall Street was shaken by non-farm payrolls for February, which showed an increase of 135,000 – much stronger than the expected 95,000 – due to gains in service industries, notably health services, social services and education. The gains compare with a 268,000 increase in January. US hourly earnings in February rose 0.5 per cent – against expectations of a 0.3 per cent rise – or 4.1 per cent year-on-year. Unemployment came in at 4.2 per cent, in line with expectations and unchanged from January.
The market eased back in opening deals on Friday, reversing some of the strong gains seen earlier in the week, as the FTSE 100 index eased back below the 6,000 level after overnight losses on the Nasdaq, prompted by growth warnings from US chip giants, Intel and National Semiconductor. The knock-on effect on the technology, media and telecoms stocks saw the index continue to lose ground through midmorning and midday trades as investors switched out of digital economy issues in favour of safer havens.
Early afternoon deals saw a marginal extension to losses after the stronger-than-expected US figures, though the FTSE only fell back sharply once Wall Street demonstrated its distaste by plummeting immediately upon opening. The downward pressure on TMTs continued through the afternoon, with the Nasdaq index suffering a further battering as US investors reacted to the dire news from Intel.
Not surprisingly, chip stocks were particularly badly hit by the Intel earnings alert, with ARM Holdings heading the FTSE 100 fallers list, down 37-1/2 pence to 331-1/2, while second line chip maker ARC International lost 14 pence at 174-1/2. Among other weak blue chip issues, Logica lost 113 pence at 1,440, Misys fell 25-1/2 pence to 591-1/2, Marconi shed 29 pence at 481, and CMG eased 57 pence at 790.
Autonomy, soon to be demoted from the FTSE 100, shed 45 pence to 1,309 – as new contracts wins from Nortel, Telecom Italia, and MCI Worldcom were shrugged off by investors. Telecom issues were also marked lower, with market heavyweight Vodafone easing 5-1/2 pence to 201-1/2, BT off 33 pence to 555, Colt Telecom down 84 pence at 1,224, and Energis falling 29 pence at 430. C&W fell back 51 pence to 790, additionally impacted by news that it has been removed from ABN Amro’s Pan-European Focus List.
Selected financial stocks continued to suffer, with Abbey National down 51 points at 1,090, while Lloyds TSB shed 14-1/2 pence at 645, continued to be affected by the OFT report, which many see as lengthening the odds of Lloyds TSB winning clearance of its £18 billion bid for its smaller rival.
Pharmaceuticals headed the FTSE 100 index gainers board, up 51 points to 1,171, boosted by Lehman Brothers “buy” advice and positive comment in the Investors’ Chronicle. Recently, Shire shares have under-performed because of arbitrage selling linked to its take-over of Canadian group Biochem. Other drugs also featured among the blue chip gainers. GlaxoSmithKline remained a winner, up 23 pence at 1,866, while AstraZeneca firmed 60 pence at 3,120, and Nycomed gained 4 pence at 519.
Among other “old economy” gainers, Hilton Group took on 2-1/2 pence at 247-1/4 continuing to benefit from the Budget changes to betting taxes, while BAT shares, up 14 pence at 576 reflected Budget factors and defensive attractions.

BSkyB
BSkyB, the satellite TV broadcaster, reported that the total UK and Eire subscribers to Sky’s channels increased by 512,000 to 9,750,000 in the three months to 31 December 2000. The total number of DTH subscribers increased by 328,000 to 5,051,000 in the quarter, resulting in BSkyB exceeding its target of five million DTH subscribers by 31 December 2000. A record first half net DTH subscriber growth of 538,000 was achieved in the six months to 31 December 2000. At 31 December 2000 the total number of digital subscribers was 4,669,000, representing 92 per cent of the DTH subscriber base.
The number of cable subscribers taking Sky channels at 31 December 2000 was 3,724,000, a reduction of 187,000 on the comparable period. The average revenue per DTH subscriber in the quarter was £286, consistent with the previous quarter, and an increase from £281 in the comparable period. The top tier DTH Sky World package continues to be taken by 59 per cent of all Sky digital subscribers. Annualised quarterly DTH churn remained flat on the previous quarter at 9.8 per cent representing a 0.4 percentage point reduction on the comparable period.
Meanwhile, the penetration of Sky channels grew by 5.1 percentage points to 36.2 per cent of UK television homes compared to the same period in the prior year. This contributed to the 18 per cent growth in advertising revenues in the period. Sky’s audience share continued to rise as that of terrestrial channels declined. Sky channels’ share of viewing in all UK homes for the quarter increased by 26 per cent on the comparable period, from 4.5 per cent to 5.7 per cent.
Multi-channel television has more than doubled its share of the commercial audience since 1995 to reach 19.2 per cent of commercial impacts in 2000, reflecting the rapid take-up of Sky digital in the past 12 months. The recent premiere of Temptation Island on Sky One achieved a 7.2 per cent share of audience in multi-channel homes. Six of the top 10 rating non-terrestrial entertainment programmes in Sky digital homes are on Sky One. Sky Sports signed up its five millionth subscriber in December 2000. During the next six months Sky Sports will be showing England’s cricket tour of Sri Lanka and exclusive coverage of the British Lions rugby tour of Australia.
BSkyB’s total subscriber revenues increased by £177 million (26 per cent), on the same period last year, to £861m. DTH revenues increased by £179 million (33 per cent) to £715 million following a two per cent increase in average revenue per subscriber and a 29 per cent increase in the average number of subscribers. Sky Box Office (“SBO”) income increased £15 million to £35 million as a result of an increase in the average number of subscribers of 1.1 million. This was partly offset by a reduction in buy rates together with fewer boxing and musical events in this period. Wholesale revenue from cable fell by £11m in the period to £121m due to a three per cent fall in the average number of cable subscribers and a four per cent fall in the average revenue per cable subscriber.
As part of a re-appraisal of investments the Group decided to make a general provision against the portfolio of new media companies. This has led to a non-cash exceptional charge of £25 million. As disclosed in the results to 30 September 2000 there was a £70 million non-cash exceptional charge in the period relating to KirchPayTV’s disposal of its remaining BSkyB shares.
The arrival of digital broadcasting posed just as many challenges as opportunities. Interactive TV should generate substantial future revenues but the market is still unproved. The Open Interactive iTV platform is recognised as a world leader, and has the potential to be transferred to Premiere World in Germany and also to DirecTV if a Sky Global/Hughes merger goes ahead. Analysts believe that so far BSkyB has managed to stay ahead of its rivals by investing heavily.

Shell Transport
Shell Transport, the integrated oil and gas group, reported that in 2000, industry refining margins recovered in all markets from the record low levels of 1999 as product stocks remained low throughout the year. Refining margins increased from an average of $1 a barrel in 1999 to $3 a barrel in Rotterdam, from $1.95 to $4.50 on the US Gulf Coast and from $0.65 to $1.65 in Singapore.
Tighter product specifications and limited spare capacity in the US and Europe are likely to support margins in these regions during 2001. In the Asia-Pacific area, margins are likely to be under pressure due to the regional over-capacity.
Shell reported that chemicals trading conditions were particularly challenging in the fourth quarter. Cracker margins fell sharply from the third quarter to below the levels seen in the fourth quarter 1999 and very difficult trading conditions prevailed in businesses downstream of the cracker. The outlook remains unsettled, especially in the USA where there are uncertainties over economic growth and the cost of feedstocks and energy.
The cost improvement target for end 2001 (relative to a 1998 baseline), which was increased to $4bn a year in December 1999, has been reached a full year ahead of schedule. The $4bn achieved comprises $1.9bn for Exploration and Production (of which $840 million was from exploration expense savings), $1.4bn for Oil Products, $550m for Chemicals and $130m for other businesses. These lower costs were a major contributor to the strong underlying performance improvement of the group. The new cost improvement target of $5bn a year for end 2001, was announced in December 2000.
The overall business environment was more favourable as the benefit of higher oil and gas prices and higher refining margins more than offset the effects of lower marketing and chemicals margins. The Return on Average Capital Employed (ROACE) for the 12 months to 31 December 2000 was 19.5 per cent compared with 12.1 per cent a year ago.