5 - 11 April 2001

Investors Corner

The market
UK blue chips ended higher on Friday after a fairly quiet final session of a volatile week, finishing well below early morning highs as Wall Street put in a cautious and mixed early performance after some worrying US data. Strength in selected “old economy” issues, and some window dressing ahead of the end of the quarter, and the end of the tax year on 4 April, provided the only real support in London, countered by fresh falls from “new economy” stocks.
At the Friday close, the FTSE 100 index was 45.3 points firmer at 5,633.7, below a peak of 5,664.8 recorded at 9.04am, but well above a low of 5,574.1 registered almost at open. All the broader FTSE indices were firm, aside from the TechMARK 100 index – off 15.64 points at 1,927.58. Volume in London was moderate, with 1.857 billion shares changing hands in 116,452 transactions.
After moving lower at the Friday start following a mixed overnight performance in New York, leading shares soon picked up, rallying in to the blue helped by initial rallies from telecoms issues as investors sought out attractively valued “new economy” stocks following the recent sell-off in reaction to Nortel’s warning.
However, a lack of follow-through buying soon reversed the trend for telecom issues, which turned lower with some inevitable profit-taking as the morning session progressed, with technology stocks also cold shouldered again after Nasdaq’s overnight falls. A lack of any key UK economic pointers to provide any alternative direction also kept blue chips off their best levels, with the main focus directed towards a key batch of US data due late afternoon in London.
The Chicago Purchasing Management Association saw its key index of regional business activity fall to 35.0 in March, down from 43.2 in February, while market forecasters had predicted an increase to 44.0-44.5. The final University of Michigan consumer sentiment index was revised down to 91.5 in March, against a 91.8 preliminary reading.
Analysts pointed out that the big drop in the key Chicago PMI reading had spooked Wall Street, showing the continuing impact of the US economic slow down, although the news could also be seen as adding to the case for further Fed. interest rate cuts in the near future.
But, in reaction to the Chicago PMI news, the DJIA saw a wobble after its early gains, while the Nasdaq composite index turned lower, affected too by another earnings warning from a US technology firm – with semiconductor firm Cirus Logic cautioning that its profits for the next two quarters will not meet Wall Street expectations citing inventory charges. As a result, by the London close, the DJIA was 25.40 points firmer at 9,824.46, but the Nasdaq composite index was 12.65 points lower at 1,807.92.
“Old economy” issues dominated on the blue chips leaders board, with drug stocks making most of the running thanks to their defensive attractions. AstraZeneca finished off its best levels but still got a good boost from news it is seeking FDA approval for its Faslodex breast drug after successfully completing clinical trials. AstraZeneca shares took on 116 pence at 3,360.
Fellow drugs blue chip Nycomed Amersham saw support again, up 25-1/2 pence at 491, continuing to be helped by Merrill Lynch’s recent upgrade to “buy”. GlaxoSmithKline also found gains, adding 48 pence at 1,841, while Celltech Group topped the FTSE 100 gainers, rallying 64 pence higher to 1,210. But Shire Pharmaceuticals failed to join in, running in to profit taking after its strong gains over the past few sessions. Shire shares had seen a good boost this week on arbitrage-linked short selling following news that the group’s completion of its agreed takeover of Nasdaq-listed Biochem has been delayed by the Canadian government.
Elsewhere, back among the blue chips gainers, financial issues found support, lifted by fresh consolidation hopes in the wake of news that Allianz is in talks with Dresdner Bank, and as rumours circulated that Citibank is casting an eye over American Express. Fund management groups stood out, with Schroders gaining 37 pence at 1,055 and Amvescap adding 33 at 1,025.
Among banking issues, Abbey National stood out, firming 32 pence at 1,124 as investors assessed the bid situation surrounding the group following the UK Competition Commission’s ground breaking public hearing into Lloyds TSB’s proposed takeover of the firm. Speaking after the meeting, Lloyds TSB deputy chief executive Mike Fairey said that he was relatively confident that Lloyds TSB will clear all regulatory hurdles and be given the go-ahead by the Competition Commission to take over Abbey National. Lloyds TSB shares firmed 3-1/2 pence at 691-1/2.
Meanwhile, Rio Tinto also saw good gains, adding 35 pence at 1,225, after Lehman Brothers initiated coverage with a “buy” rating, pointing out that the mining group’s diversified focus offers more opportunities to grow. GUS, up 14 pence at 495, received a boost from news of the disposal of its KC Finance unit to Close Brothers for £50.4 million.
ARM Holding was also a blue chip gainer, bucking the otherwise dull trend in the technology sector – and the profit warning from US chip maker Cirrus Logic – thanks to a spot of bargain hunting. ARM shares took on 13 pence at 329. However, other technology blue chips suffered a down turn after recent recoveries, affected by Nasdaq’s retreat amid continuing earnings concerns.

Powergen
Powergen, the electricity generator, distributor and supplier, reported that its UK business performed ahead of expectations last year. The company’s integrated approach continued to deliver value, confirming that it had the correct model for the UK market in today’s competitive environment. Its retail business passed the three million customer account mark providing profitable growth through getting more customers and selling more products. Energy trading continued as the hub of its integrated business, co-ordinating its market actions and maximising the value of its generation and customer assets.
Powergen’s production business provided low cost generation giving flexible options to its energy trading business. In distribution, Powergen is nearing completion of its cost saving initiatives, proving that its asset management skills are just as relevant in distribution as they are in generation.
UK Electricity prices stabilised in the second half of 2000 with annual baseload contracts at around £19/MWh. Powergen’s hedging policy meant that the impact of lower prices from February 2000 only started to have a material impact in the fourth quarter of 2000. Nevertheless, these lower prices will have an impact for the whole of 2001. Higher gas prices are expected to have a small effect on profits. Powergen’s generation output and gas costs are largely hedged through 2001. However, this position will move throughout the year and Powergen is hoping to take on these opportunities to secure additional value as they arise.
The New Electricity Trading Arrangements (Neta) are scheduled for introduction on 27 March. For Powergen, with its flexible generation, growing customer base and integrated trading strategy, Neta represents a business opportunity rather than a threat. With its strong national brand Powergen should continue to build on the successes of its winning retail business. Powergen exceeded its three million customer account milestone late in 2000 and now has the products and sales infrastructure to achieve its target of five million by the end of 2002.
Its focus for 2001 in the residential market is expected to continue to grow its customer base organically, while ensuring it retains its existing customers and cross sell new products to them. The Small & Medium Enterprise (SME) market continues to be Powergen’s fastest growing and most profitable retail business segment achieving 53 per cent growth during the year.
Across the Atlantic, Powergen completed its acquisition of LG&E on 11 December. Although the transaction took just over nine months to close, Powergen was able to spend the time before completion working with LG&E to benchmark their business against world’s best practice. Efficiency improvements, to be delivered over the next three years, will be greater than initial expectations and LG&E has already announced a voluntary severance package.
Initial indications are that the take up for this package will be good, with staff reductions to be phased in to ensure no loss of service quality. Operationally, LG&E has had a good year in both the regulated utility operations of LG&E and Kentucky Utilities (KU), and in their unregulated businesses. The acquisition of LG&E cost £2,258 million and created goodwill of £1,498 million. As a result gearing, defined as debt as a proportion of total capital, increased to 70 per cent at the year end.
Having set itself a target of reducing debt by £1 billion through the sale of assets in the UK and overseas, Powergen reported that it is expected to exceed this sum. Overall the asset sale programme is on target to reduce debt by around £1.25 billion.
Powergen decided to retain Connah’s Quay in the UK and is still reviewing the options for its assets in Germany and Hungary.
Due to abnormal weather conditions, system demand was up 2.2 per cent on the previous year to 301.6 TWh. High availability from Powergen plant, together with an increase in outages from competitors, allowed for an increase in output. Powergen generated 43.2 TWh, a market share of 14.3 per cent up slightly compared with output from the same plant in 1999. Looking ahead and allowing for the impact of the sale of the two plants, Powergen expects to generate around 30 TWh in 2001 (around 10 per cent market share).
Looking ahead, distribution will continue to be a core part of Powergen’s business strategy. Should the opportunity arise, and if at the right price, the company would seriously consider the purchase of a second distribution business to build on what has been delivered at East Midlands. Powergen is also actively looking at asset management opportunities in managing other distribution assets owned by others. Overall, Powergen has either met, or exceeded, all of the objectives that it set for itself last year. Powergen has transformed itself during the year 2000 into a business well positioned to take advantage of opportunities that will arise from the developing competitive markets in the UK and the US.