MEDIA
Advertising slides sharply
“ARE we in recession?” screamed Wednesday’s Birmingham Post, next to a graphic
of a pink piggybank with a £50 note slotted in the top.
The Post’s owner, Trinity Mirror, moved a step closer to being able to answer
in the affirmative last week,writes James Ashton. It dealt the media sector
another blow on Monday, revealing that the 2% drop in advertising income at
the Daily Mirror, Sunday Mirror and The People reported for the first four
months of the year had become a 13.5% slide in May and June.
Classified advertising for jobs, cars and houses has been weak for months. Now
a fall in spending is spreading to display advertising, prompting Trinity to
warn that group operating profits will be 10% lower than expected. Shares in
Trinity and rivals Daily Mail and General Trust and Johnston Press, owner of
The Scotsman and Yorkshire Post, are plumbing 15-year lows.
“It looks like they are being priced to die,” said Richard Menzies-Gow, a
media analyst at Dresdner Kleinwort. “That feels wrong, but the problem is
we are only just starting to get the worst economic news coming through.”
Newspaper publishers are not alone. Shares of Yell, which owns Yellow Pages,
are one of the worst performers this year, down 84%. Not only is local
advertising a worry, but the group is saddled with £3.8 billion of debt
after an acquisition spree in America and Spain. Operating cashflow of £626m
last year suggests its owner could trade its way through, but the market
doesn’t believe so. Yell’s shares are trading at a mere 1.5 times forecast
earnings. Crucially, with a market value of just over £500m, Yell has missed
the window for a rights issue. Some shareholders believe a debt-for-equity
swap looms.
ITV has also been dragged down, even though its audience performance has been
the best since 1993. “ITV continues to make good operational progress,” said
John Cresswell, ITV’s chief operating officer. “In the first half of 2008,
ITV delivered its advertisers more impacts and outperformed its
competitors.” However, with 20% of ITV1’s income pegged to the retail
sector, analysts fear a downturn cannot be far behind the rest of the
industry.
...except those dealing in commodities
HOUSEBUILDING
Small players are massacred
THE gloom over Britain’s housebuilders is about to get deeper,writes Dominic
O’Connell.
Over the next three days, three of the big players - Persimmon, Redrow and
Barratt - will publish trading updates. They are not expected to make happy
reading, with each group likely to report falls in sales ranging from 20% to
50%.
Housebuilders are in crisis, caught by a vicious fall in demand and an equally
vicious turn in stock-market sentiment. For those with substantial
borrowings, taken on to finance acquisitions during the boom times just a
few years ago, the struggle is desperate.
Last week Taylor Wimpey was forced at the last minute to abandon a plan to
raise £500m by selling new shares to existing shareholders. Along with the
collapse of the fundraising, it said its finance director, Peter Johnson,
would leave at the end of the year.
The rushed nature of the announcement caused near panic among the company’s
investors. Taylor Wimpey shares nearly halved after the announcement, but
recovered slightly to end the week at 3¾p. Chief executive Peter Redfern
insisted there was no immediate cashflow problem, and the group had until
the end of the year to raise money. He said it was in talks with
shareholders about a solution.
While the big boys are struggling, the minnows are being mowed down. According
to figures from Begbies Traynor, the insolvency specialist, 136
housebuilders have been placed in administration this year. There will be a
shortfall in the number of new homes built this year. In 2007, there were
190,000 built in England, according to the Home Builders Federation, a trade
body. Estimates suggest the figure for 2008 will be half that number, and a
long way short of the government’s target of 140,000 new homes every year
until 2016.
Workers in the industry will also be hard hit. During the last big downturn in
the late 1980s and early 1990s, some 500,000 construction workers were laid
off.
While most investors have been scrambling to unload shares, a few brave fund
managers have begun buying into the sector, judging that the bottom has been
reached. This week’s trading statements should give some guidance as to
whether they are right.
BANKING
Investors fear more bad news
“I DON’t think I’ve ever seen bank shares as cheap as this,” said a senior
trader last week, as the dealing screen in front of him flashed red with
falling stock prices. “The trouble is that I can’t find anyone who wants to
buy them.”
Britain’s banks have been pummelled in recent months, as losses from American
sub-prime investments have been compounded by fears about falling house
prices in Britain, and the potential for global recession,writes Iain Dey.
Over the past year the FTSE Banks index has lost more than 43% of its value,
driven by the collapse of Northern Rock, the woes of Bradford & Bingley
and huge fundraisings by Royal Bank of Scotland, Barclays and HBOS.
Four of Britain’s top five banks are trading at share prices of less than six
times their forecast earnings. Barclays and Lloyds TSB are trading on
prospective dividend yields of more than 12%.
Fear of the unknown, however, is keeping investors away. “It’s at that point
where it could go one way, it could go the other,” said Graham Ashby at
Credit Suisse. “While stocks are beginning to look cheap on a number of
measures, every day more bad news comes out, and the bears look right.”
Ashby’s research suggests that UK shares represent better value now than at
any time since 2003, with financials among the cheapest. The only UK bank
stocks he holds, however, are Standard Chartered and HSBC, which have little
exposure to Britain and have been largely unaffected by the global credit
crisis.
There is still a feeling that British banks could have more nasty surprises in
store as houses begin to be repossessed and businesses stare insolvency in
the face.
Analysts who spend their lives studying bank balance sheets are coming up with
radically different interpretations of what the the figures they are
assessing actually mean.
Only two days after Barclays announced a £4.5 billion fundraising led by
sovereign wealth funds from Qatar, China and Singapore, a Citigroup research
note suggested the bank could need as much as £9 billion more.
“You just don’t know what to believe,” said one fund manager . “We are
steering clear of banks altogether until we feel more comfortable with the
newsflow.”
MINING
Commodities keep booming
NOT everyone in British business is tearing his hair out. While retailers and
housebuilders are in despair, oil and mining groups have never had it so
good,writes Dominic O’Connell.
There is a simple reason for this. Marks & Spencer, Pendragon and Taylor
Wimpey - companies that saw their share prices savaged last week - come from
different sectors, but they all rely on British consumers to buy their
products.
Rio Tinto and BHP Billiton, two big mining groups, are also quoted in London,
but sell little in Britain. Instead their products - iron ore, aluminium,
copper, nickel, coal, uranium and other basic materials dug out of mines
around the globe - are being hoovered up in record amounts by the emerging
economies of China, India, Vietnam, Russia and Brazil.
Shares in mining companies have outperformed other London stocks significantly
over the past year. Their performance, and that of big oil groups, helps to
explain the resilience of the FTSE 100 index this year. Oil and mining now
account for about 35% of the value of the top 100 club. The index closed the
week at 5,412.8, down 16% since the start of the year.
The London stock market’s reliance on mining and oil has prompted some
analysts to question what would happen if the commodities bonanza came to an
end.
“We think it’s bad now, but if oil and mining shares take a tumble then we are
in real trouble,” said one. A crack in the commodities boom would
immediately send the FTSE 100 below the important 5,000 mark, and would
plunge countries reliant on mining, like Australia and Brazil, into
recession.
None of the big mining groups, however, thinks the slowdown in western
economies will halt the juggernaut. Instead, they are investing as fast as
they can to increase production, confident that demand from the emerging
economies will continue to outstrip supply.
“It’s a deficit of supply that has caused the situation we find ourselves in
at the moment,” Marius Kloppers, the chief executive of BHP Billiton, said
recently. Most analysts agree, pointing out that while mining stocks have
fallen back, the price of the commodities they produce has continued to rise
strongly.
