It has been one of the oddities of this August that while two-thirds of the
City is on holiday abroad, back home it has been frenetic on the company
reporting front. It’s all down to the new European transparency directive,
which requires all companies to produce their half-yearly results within two
months of that period ending.
And what a ludicrous directive it is. Rather than wait until September, when
the City is back at work, companies have been required to report in a
vacuum, with scant regard being given to their figures by a second-string
team of advisers, analysts and investors.
Something must be done about this. The directive has resulted in a huge
disservice to the investment community. Large companies have seen their
figures slip through the net with little scrutiny.
Not that the figures would have cheered many people up. The over-riding theme
of this reporting season, in full swing this week, has not been what has
gone on before. What has mattered is the outlook statements made by chairmen
and chief executives. It provides a clear indication of what is to come in
the last quarter and beyond — and it is not good.
Companies, particularly those reliant on the British economy, are finding the
outlook very challenging. That is the main reason why the bear rally has
fizzled out and equity markets, particularly in the FTSE 250 and below have
slipped back.
Six months ago, when companies last reported, many of them were still clinging
to the hope that if there was a slowdown they were not yet feeling it.
Now such optimism has gone and it is not surprising. Official figures released
on Friday showed that UK economic output failed to grow at all in the second
quarter, breaking 63 quarters of consecutive growth. An international group
such as Diageo will buck the trend this week when it reports (largely due to
the thirst for spirits from emerging markets) but businesses reliant on
Britain are running out of reasons to be cheerful.
Companies are accepting that they will have to hunker down for the next 18
months. As a result they will be forced to cut costs to realign their
operations with an economy that is stuck in the slow lane and possibly going
backwards.
Housebuilder Persimmon suggested last week that the worst could be over, but
when your business has been hit by a hurricane it is hard to see what
further damage could be inflicted. As Trevor Finn, the chief executive of
Pendragon, the car dealer, will say this week, the next 12 to 18 months will
be about toughing it out. If conditions do start to ease, it will be a
pleasant surprise.
Property’s slippery slope
Brixton, the property group that specialises in owning industrial estates, is
not a company that often steals the financial headlines. But last week it
did so when its chief executive, Tim Wheeler, borrowed the opening lines of
Bob Dylan’s All Along The Watchtower — “There must be some way out of here”
— to highlight the fact that with the economy in meltdown and no willing
buyers and sellers, it is impossible to know what property is worth anymore.
The City has taken its own view and marked Brixton’s shares down to 50% of
the group’s stated net asset value.
Part of the difficulty in establishing what true values are lies with the
banks. They are exposed to billions of pounds of property, much of which is
now worth less than the loans on which they were based. Banks have tried to
keep values artificially high, but everyone recognises that is no longer
tenable.
There are lots of individuals and companies who have built up highly leveraged
property portfolios over the past two years that are now in serious trouble.
The banks have desperately tried not to take the problems onto their own
balance sheets, but that time is coming.
When they do sell, we will know what buildings are worth again. But I suspect
that while there are tough times ahead, they will not be as bad as Brixton’s
share price suggests. The company, which owns a collection of industrial
estates around the country, has seen its price fall to 220p against a net
asset value of 448p (which is already a 15% adjustment downwards from last
year).
Brixton is not alone. British Land, which is heavily exposed to City offices,
is in a similar position. Its shares are now standing on a discount of 40%
to its stated net asset value of £11.61.
Mike Prew, property analyst at Lehman Brothers, is forecasting the property
group’s net asset value will slip over time to 993p. That still puts the
shares on a discount at a time when the sector could be emerging from the
gloom.
The same reasoning applies to Land Securities, Hammerson, Liberty
International and all the other property majors. It does not mean that the
property sector will not be hit by further turmoil — assets are overvalued,
tenants will be go bust and voids will rise. But I agree with Wheeler that
in terms of adjustments in valuation, it won’t be as bad as the City thinks.
Iron wills
Tom Albanese, chief executive of Rio Tinto, the mining group locked in a
gargantuan takeover battle with BHP Billiton, will make it clear this week
when he reports half-year results that this is not a time for grand
gestures.
It is a time instead to showcase the group’s strength — its enormous financial
muscle, muscle that has been pumped up by the economic steroid of soaring
commodity prices.
Albanese will do that with a 45% lift in earnings, largely achieved through
the runaway iron-ore price. The dividend will be hiked by 30%. Albanese will
also try to demonstrate that Rio is better run than its would-be predator,
and if BHP is serous about wanting to buy it, it will have to pay a lot more
than it is proposing at present. He will try to face down sceptics of the
group’s faith in aluminium and its (to date) slow progress in selling
non-core assets.
It is going to be a long fight. On Friday we received some guidance on how it
might develop when the Australian competition authorities said there were
problems in bringing together the two iron-ore businesses. The finding was
no surprise. Between them, they control most of Australia’s reserves of the
now-precious red rock, so the sale of part of the operation is likely.
It won’t be until just before Christmas, however, when the European
authorities report on the deal, that we will get a clearer idea of the way
forward. That’s when Albanese and his BHP counterpart, Marius Kloppers, will
take the gloves off.
john.waples@sunday-times.co.uk
