No cash from currency turmoil
Friday 05 May 1995
Indeed, the combination of sterling's weakness against European currencies and its 3 per cent rise against the dollar is almost a dream scenario for exporters and businesses with big Continental operations. That ought to spell good news for shareholders.
Europe is now Britain's biggest market, taking 60 per cent of our exports. The pound's fall has allowed UK exporters to widen profit margins. Recently British Steel announced price rises of between 8 and 12 per cent on flat steel, while its Continental rivals are having to make do with somewhere between 5 and 6 per cent.
Others in prime position to benefit from sterling's weakness are companies like RMC and Redland, with respectively large concrete and roof tile interests in Germany. Profits from these operations should get a boost on translation into the home currency if current rates are held. The other benefit of recent currency movements is that raw material costs tend to be priced in dollars, which should mean little pressure from currency on the cost side, although the effect has recently been cancelled out by surging demand.
Things, however, are rarely that simple. The strength of the mark is clearly causing worries about the German economy, as the Bundesbank's recent decision to cut interest rates bears witness, so the beneficial effect of exchange rates could be wiped out by lower sales.
German exporters could also soon see their products priced out of the international market. If they were to re-focus on their own market, competition would increase.
But how important is this for investors? James Capel forecasts that about half of UK corporate profits will come from the UK this year. Of the remainder, 21 per cent will arise in dollars and 15 per cent in European currencies. If the dollar ends up depreciating by 6 per cent this year and the European currency unit strengthens by 4 per cent, the effects will almost cancel out, the broker believes.
Add in the expectation that the dollar - and hence the pound - is expected to strengthen during the course of 1995, and it becomes clear that investors should not look forward to a bonanza from currencies this year.
Kwik Save caught in the middle
Kwik Save, Britain's largest discount supermarket group, has been caught in the crossfire between the superstore groups and Continental discounters such as Aldi and Netto for about five years now. The pain is beginning to show.
The grocery giants such as Sainsbury and Tesco have launched their own budget lines in stores that are more pleasant to shop in. And the Continental operators have stolen Kwik Save's clothes as the discounter par excellence, with prices cut to the bone on limited ranges of goods in basically fitted shops.
In truth it is the might of Tesco, Sainsbury and Safeway that is chipping away at Kwik Save's position. Thanks to their budget ranges the discounter has lost much of its price advantage on basic items such as bread, milk and sugar.
Yesterday's half-year results show that stuck in the middle is no place to be. Pre-tax profits in the six months to March fell by nearly 6 per cent to £61.6m, despite increased sales of £1.7bn. Like-for-like sales fell 3.5 per cent, compared to Tesco's recent 7 per cent increase.
Graeme Bowler, chief executive, says Kwik Save has been losing customers to the competition and that shoppers have been trading down to cheaper goods. Competition is brutal in the overcrowded discount sector and Mr Bowler predicts casualties. Kwik Save swallowed Shoprite, the Scottish chain, in November, Argyll abandoned Lo Cost, and Budgens recently retreated from its experiment with the German inspired Penny Market. Expecting much more of a fall-out could be wishful thinking.
Kwik Save is not sitting still. On Tuesday it launched new price cuts in an attempt to re-establish its discount credentials. It is expanding its range of goods to include more chilled and frozen foods, which have higher margins. It is also turning itself into a one-stop shop on the high street by offering newspapers, discounted magazines and stationery. A programme is under way to modernise the worst 350 stores. But Kwik Save is still adding 70 new shops this year in a market that needs less space, not more.
The broker UBS is forecasting full-year profits of £127.5m for the year and earnings of 54.3p. At yesterday's closing price of 573p this puts the shares on a p/e ratio of around 10.5, a substantial and justified discount to the market. With competition unlikely to abate, the shares should be avoided.
for the future
Bellway did not shrug off the recession, but it navigated the slump with a great deal more ease than most of its rivals in the housebuilding sector. Interim figures yesterday showed that it is also handling the recovery pretty well.
Pre-tax profits, up 38 per cent to £13.8m, benefited from a big jump in house completions to 1,555 in the six months to January, up from 1,212. Earnings per share were 44 per cent better at 8.5p, allowing an 11 per cent rise in the interim dividend to 2.45p.
The real advantage of higher volumes to a housebuilder is not size for size's sake but better recovery of overheads and therefore wider margins. In the first six months they added 1.2 percentage points to 12.6 per cent and last year's full-year return of 13.5 per cent should be comfortably bettered.
Bellway's return on sales has risen inexorably over the past four years, up from just 7.8 per cent in 1991. All the builder's numbers are moving in the right direction, with the land bank up from 5,500 in 1991 to 12,600 currently and sales volumes compounding at 25 per cent a year.
There are clouds on the horizon. Land prices are still too competitive to allow Bellway to grow its stock of plots as fast as it would like. Building costs are also pushing ahead.
For those reasons, the market took a serious dislike to builders in the spring of 1994 and Bellway's shares lost a third of their value from a high of 295p. There has been a bounce since, but at 228p, up 4p, they stand on a prospective p/e of only 11. Fair value.
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