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
News
election 2015The 10 best quotes of the campaign
News
A caravan being used as a polling station in Ford near Salisbury, during the 2010 election
election 2015The Independent's guide to get you through polling day
News
people
Voices
David Blunkett joins the Labour candidate for Redcar Anna Turley on a campaigning visit last month
voicesWhat I learnt from my years in government, by the former Home Secretary David Blunkett
ebooks
ebooksA celebration of British elections
  • Get to the point
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

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

'We will not sit down with Nicola Sturgeon'

In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

How ordinary Britons celebrated VE Day

Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
They came in with William Caxton's printing press, but typefaces still matter in the digital age

Typefaces still matter in the digital age

A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

'Missing link' between Earth's two life-forms found

New microbial species tells us something about our dark past, say scientists
The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

Pan Am Experience: A 'flight' back to the 70s

Tim Walker checks in and checks out a four-hour journey with a difference
Humans aren't alone in indulging in politics - it's everywhere in the animal world

Humans aren't alone in indulging in politics

Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

Crisp sales are in decline

As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

Ronald McDonald the muse

A new wave of artists is taking inspiration from the fast food chain
13 best picnic blankets

13 best picnic blankets

Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

Barcelona vs Bayern Munich player ratings

Lionel Messi scores twice - but does he score highest in our ratings?
Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

Explosive batsman who sets the range for Kiwis' big guns

Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'