No cash from currency turmoil

Consumers will have plenty of reason to bemoan sterling's 8 per cent decline against the German mark this year if, as expected, the Chancellor raises interest rates today to support the currency. But while the pound's fall may be bad news for shoppers and holidaymakers, all is far from doom and gloom in some of Britain's boardrooms.

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.

Bellway builds

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.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
The Doctor and Clara have their first real heart to heart since he regenerated in 'Deep Breath'
TV
Arts and Entertainment
James Hewitt has firmly denied being Harry’s father
arts + ents
Arts and Entertainment
Jamie Oliver
filmTV chef Jamie Oliver turned down role in The Hobbit
News
The official police photograph of Dustin Diamond taken after he was arrested in Wisconsin
peopleDownfall of the TV star charged with bar stabbing
PROMOTED VIDEO
Life and Style
tech
Arts and Entertainment
Jeremy Clarkson, left, and Richard Hammond upset the locals in South America
tvReview: Top Gear team flee Patagonia as Christmas special reaches its climax in the style of Butch and Sundance
News
people
Sport
Ashley Barnes of Burnley scores their second goal
footballMan City vs Burnley match report
News
news
Arts and Entertainment
Peter Mayhew as Chewbacca alongside Harrison Ford's Han Solo in 'Star Wars'
film
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
News
i100
Arts and Entertainment
Man of action: Christian Bale stars in Exodus: Gods and Kings
film
Life and Style
Apple showed no sign of losing its talent for product launches with the new, slightly larger iPhone 6 making headlines
techSecurity breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Arts and Entertainment
Catherine (Sarah Lancashire) in Happy Valley ((C) Red Productions/Ben Blackall)
TV
Arts and Entertainment
Clueless? Locked-door mysteries are the ultimate manifestation of the cerebral detective story
booksAs a new collection of the genre’s best is published, its editor explains the rules of engagement
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

A timely reminder of the bloody anniversary we all forgot

A timely reminder of the bloody anniversary we all forgot

Who remembers that this week we enter the 150th anniversary year of the end of the American Civil War, asks Robert Fisk
Homeless Veterans appeal: Former soldiers pay their respects to a friend who also served

Homeless Veterans appeal

Former soldiers pay their respects to a friend who also served
Downfall of Dustin 'Screech' Diamond, the 'Saved By The Bell' star charged with bar stabbing

Scarred by the bell

The downfall of the TV star charged with bar stabbing
Why 2014 was a year of technological let-downs

Why 2014 was a year of technological let-downs

Security breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Cuba's golf revolution: But will the revolutionary nation take 'bourgeois' game to its heart?

Will revolutionary Cuba take 'bourgeois' golf to its heart?

Fidel Castro ridiculed the game – but now investment in leisure resort projects is welcome
The Locked Room Mysteries: As a new collection of the genre’s best is published, its editor Otto Penzler explains the rules of engagement

The Locked Room Mysteries

As a new collection of the genre’s best is published, its editor explains the rules of engagement
Amy Adams on playing painter Margaret Keane in Tim Burton's Big Eyes

How I made myself Keane

Amy Adams hadn’t wanted to take the role of artist Margaret Keane, because she’d had enough of playing victims. But then she had a daughter, and saw the painter in a new light
Ed Richards: Parting view of Ofcom chief. . . we hate jokes on the disabled

Parting view of Ofcom chief... we hate jokes on the disabled

Bad language once got TV viewers irate, inciting calls to broadcasting switchboards. But now there is a worse offender, says retiring head of the media watchdog, Ed Richards
A look back at fashion in 2014: Wear in review

Wear in review

A look back at fashion in 2014
Ian Herbert: My 10 hopes for sport in 2015. Might just one of them happen?

Ian Herbert: My 10 hopes for sport in 2015

Might just one of them happen?
War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?