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BHPs Upturn Plans – US-FOREX.US

Forex-Publisher — Wed, 12 Aug 2009 21:46:28 +0000

Cost consciousness is paying off at BHP Billiton. While the mining industry is still licking the wounds from an up to 90% tumble in some metal prices and faltering growth in commodity-gobbling China, the Anglo-Aussie company is keeping its eyes peeled for acquisition opportunities.
While investment in forthcoming projects would be its priority, “we do look at M&A opportunities,” Chief Executive Marius Kloppers told Forbes. Petroleum – a rapidly expanding and cheap to produce business for BHP – would be one of the areas that they’d consider, he added.
Profits at the Anglo-Australian firm fell during the year ending in June by 61%, but the fall was smaller than had been expected and there were a number of other positive signs. Topping the list for analysts was operating cash flow, the amount of cash generated from a company’s operations, and a closely watched measure of profitability. While the drop in commodity prices eroded cash flows at many mining companies-Switzerland’s Xstrata, for example, saw its first-half-year figure slide 73%-at BHP Billiton
, operating cash flow rose by 5.6% to 18.9 billion, suggesting that the firm’s cost-cutting strategy was having the desired effect. The company’s pretax, pre-interest profit margin came in at 40.6%, a decline from the year before but still well above the rest of the industry. “The numbers were very positive in our view,” says Gabor Vogel, an analyst at DZ Bank in Frankfurt who rates the stock as the “top pick” within the mining sector. “With these figures and having paid out a dividend [17% above last year], they are showing they have a certain financial strength,” he added. Shares of BHP Billiton rose 1.9% in London on Wednesday. One reason for investors’ lack of alacrity is that the firm is remaining cautious in its outlook. Kloppers told Forbes that the market won’t see clear sustained growth until the first quarter of next year. BHP has attributed part of the surge in demand for commodities earlier in the year to Chinese firms that were restocking supplies, but he has also warned that this is at its tail end. However, that economic weakness may end up being a blessing for BHP. The firm has been positioning itself at the bottom end of the cost curve, focusing on low-cost commodities and projects where there is more slack when selling prices tumble. For example, five of the seven projects completed in the past six months were petroleum projects, which cost it around 6 a barrel to produce. The firm has several billions’ worth of further petroleum projects in the pipeline too, along with aluminum, iron ore and coal. According to Charles Kernot, an analyst at Evolution Securities, the large number of low-cost projects such as iron ore and petroleum that came live during the period contributed to the cash flow rise. BHP’s cost control should also benefit from its plans announced in June to pool its iron ore operations in Australia with Rio Tinto
. That plan took shape after Rio Tinto, under pressure in Australia, ditched a proposed investment from Chinese aluminum producer, Chinalco. Since then, Rio’s relations with China have deteriorated rapidly: late on Tuesday, Chinese authorities finally arrested four employees for trade-secret infringement and bribery. BHP has been lying low in the dispute: During a conference call, Kloppers told investors the firm was monitoring the situation but operating as usual in China.

BHPReady For The Upturn – US-FOREX.US

Forex-Publisher — Wed, 12 Aug 2009 14:46:41 +0000

The past twelve months were never going to be pleasant for miners, with spot prices for metals falling by up to 90%, and commodity-gobbler China witnessing faltering economic growth this year, but all in all, BHP Billiton seems to have coped as well as it could have under the circumstances.Profits at the Anglo Australian firm fell during the year ending in June by 61%, but the fall was smaller than had been expected and there were a number of other positive signs. Topping the list for analysts was operating cash flow, the amount of cash generated from a companies’ operations, and a closely-watched measure of profitability. While the drop in commodity prices eroded cash flows at many mining companies – Switzerland’s Xstrata, for example, saw its first half-year figure slide 73% – at BHP Billiton, operating cash flow rose by 5.6% to 18.9 billion, suggesting that the firm’s cost cutting strategy was having the desired effect. The company’s pre-tax, pre-interest profit margin came in at 40.6%, a decline from the year before but still well above the rest of the industry. . “The numbers were very positive in our view,” says Gabor Vogel, an analyst at DZ Bank in Frankfurt who rates the stock as the “top pick” within the mining sector. “With these figures and having paid out a dividend [17% above last year] they are showing they have a certain financial strength,” he added. Shares of BHP Billiton
were up 0.5%, to 15.34 pounds , in London midday trading. One reason for investors’ lack of alacrity is that the firm is remaining cautious in its outlook. Marius Kloppers, chief executive of BHP, has attributed part of the surge in demand for commodities earlier in the year to Chinese firms that were re-stocking supplies, but he has also warned that that this is at its tail end. While North America and Europe may compensate somewhat, any assumption of a quick return to historical trend growth in the wider economy “may be premature,” the firm warned on Wednesday.However, that economic weakness may end up being a blessing for BHP. The firm has been positioning itself at the bottom end of the cost curve, focusing on low-cost commodities and projects where there is more slack when selling prices tumble. For example, the firm has spent 3 billion of a total capital expenditure of 4 billion on developing petroleum projects, which cost it around 6 a barrel to produce. The firm has several billions’ worth of further petroleum projects in the pipeline too, along with aluminum, iron ore and coal.
BHP’s cost control should also benefit from its plans announced in June to pool its iron ore operations in Australia with Rio Tinto. That plan took shape after Rio Tinto, under pressure in Australia, ditched a proposed investment from Chinese aluminum producer, Chinalco. Since then, Rio’s relations with China have deteriorated rapidly: late on Tuesday, Chinese authorities finally arrested four employees for trade secret infringement and bribery. BHP has been lying low in the dispute: during a conference call Kloppers told investors the firm was monitoring the situation but operating as usual in China.

Rights Issue A Risk Too Far For Lloyds – US-FOREX.US

Forex-Publisher — Mon, 10 Aug 2009 13:46:19 +0000

Lloyds Banking Group is facing the choice between the prudent approach that it has been long been known for and a big gamble. Should it stay within the government’s asset protection program or attempt to make a bid for independence?The bank, currently 43% in the hands of the British government, is reportedly mulling a 15 billion pound rights issue, as a way of scaling back its involvement in the government program, which limits its potential losses from toxic assets. But the program comes at a price: as much as 16 billion pounds in insurance payments.The instigation for Lloyds to reconsider its options appears to be the prospects of a new chairman: Win Bischoff, who takes over as chairman in mid September, is pushing the bank towards this option, according to reports in Monday’s London Times. A spokeswoman for Lloyds declined to comment on this report, but instead insisted that the firm was “working with the Treasury” to finalize the terms of its intended participation in the scheme. “We expect to conclude those discussions and agree terms that are in the best interests of our shareholders,” she said.While participation in the toxic asset protection will protect the bank from further severe declines in the value of its assets, it is not without its downside. Aside from the pricey premium payments, the bank would also have to sell some of its branch network to alleviate concerns of the European Competition Commission and its tough head, “Nickle” Neelie Kroes, that banks receiving state aid could gain an unfair advantage over banks that do not.However, analysts warn that Lloyds may want to think twice before attempting anything on its own, despite the confidence it recently expressed as it reported its second quarter results. Shareholders would end up with “more dilution and less protection,” warns Sandy Chen of Panmure Gordon. It’s a view shared by Leigh Goodwin of Fox Pitt Kelton, who believes the bank has three options facing it: one is rejecting the insurance scheme altogether and going for a pure rights issue, which would be risky, but would allow the government to maintain its stake in the bank. Another is a reduced participation in the insurance program, backed by a rights issue, which would also struggle to get takers, or would have to take place at such a deep discount that it would be even more dilutive to existing shareholders than the existing government shares. All in all, says Goodwin, shareholders are best off with the final option-the government’s asset protection program-which is actually “quite generous” considering the circumstances. “Lloyds without asset protection is not an attractive stock,” he says.
Goodwin believes that despite the firm’s recent attempt to put a positive spin on its quarterly results, confidence in management’s ability to turn the firm around remains shaky. Shares of Lloyds Banking Group
were down 4.6%, at 97.28 pence , in early afternoon trading in London. Last week, Lloyds Banking Group reported a 6.8 billion loss for the first six months of 2009, after impairments worth 22.8 billion. Most of the troubled assets belonged to HBOS, the mortgage lender it acquired in a controversial deal. The firm had attempted to gloss over its problems somewhat, saying it had been “prudent” in making the markdowns. Nevertheless, there are likely more troubles to come, and Fox Pitt Kelton’s Goodwin believes the bank could start claiming on its insurance policy as early as in the first half of 2010.
In March, Lloyds said it would be placing 260 billion pounds worth of assets into the protection scheme but has since been firming up the exact terms of the deal.

Beijing Woos British Homeowners – US-FOREX.US

Forex-Publisher — Tue, 28 Jul 2009 16:46:03 +0000

Meet the British homeowner’s newest lender: China.Bank of China, one of the country’s four, state-owned banks, is ramping up its lending business in the U.K. as British banks remain cautious in their lending.The bank, which had already been offering loans to the Chinese community in the U.K., will begin offering mortgages for landlords, known in Britain as “buy to let” mortgages, tracking 3.5% above the Bank of England base rate. It is also offering regular residential mortgages at 2.5% above the 0.5% rate, a spokesperson for the bank confirmed in an e-mailed response to Forbes. “Our aim is to translate the global strength of our branch into a household name in the U.K.,” she added. British lenders have been criticized for failing to step up their lending to boost the British economy, despite the pressure being exerted on them to do so by Gordon Brown’s Labour government. Gross mortgage lending in June was 48% below last year’s figure, according to the Council of Mortgage Lenders’ latest data.
“[British] banks aren’t stepping up lending but focusing on shoring up their balance sheets,” said Jane King, senior mortgage advisor at Ash-Ridge Private Finance in London. She added that the rates being offered by Bank of China were “extremely good” for tracker mortgages.
One area where the Bank of China could have a big impact is on the buy-to-let sector. Buy-to-let mortgages in particular have taken a hit, falling to 6% of mortgage lending in the first quarter of the year, from double that figure a year ago, according to the CML data. “Many lenders are simply not lending to professional landlords, so there is a lack of competition in this area and a need for alternatives,” said Ian Butler, a mortgage broker at Connect Mortgage Solutions, one of the firms that will be offering the Bank of China mortgages. “There is a big shortage of capacity in the market at the moment,” said Leigh Goodwin, an analyst at Fox-Pitt, Kelton in London. “A lot of lenders are exiting the business and those in it, such as Paragon, aren’t lending anymore.” Troubles in the British buy-to-let sector were thrown into the spotlight late last year when the British government took control of mortgage lender Bradford & Bingley’s 50-billion-pound mortgage and lending division after a sharp drop in house prices sent bad loans soaring. The Bank of China will be taking an ultracautious approach in its lending, it appears. According to its spokesperson, “as part of the underwriting process, applicants will be invited to a face-to-face interview” at one of the bank’s branch networks in London, Manchester, Birmingham and Glasgow.

Rough Ride For RBS Lloyds – US-FOREX.US

Forex-Publisher — Fri, 24 Jul 2009 14:45:58 +0000

Britain’s Royal Bank of Scotland and Lloyds Banking Group have buckled to the muscle of Brussels, submitting proposals to restructure their businesses. But whether it will be enough to satisfy the stringent requirements of the European Commission remains to be seen. Outlining the commission’s latest guidelines on conditions that must be met by banks receiving state aid for more than six months, Philip Lowe, director of the Commission’s competition department, said that two “very big” British banks had submitted their proposals for restructuring in the past two months.
RBS
, which is 70% owned by the British state, has already outlined plans to sell off 240 billion pounds of non-core assets including in Asia and Europe as it attempts to refocus its operations on the U.K. Lloyds Banking Group
, 43% controlled by the government, has already announced that it would be winding down its Cheltenham & Gloucester thrift subsidiary. However, recent speculation has pointed to Lloyds’ need to sell part of its massive branch network and a lucrative asset management division in order to allay concerns about having uncompetitive advantages through the state aid.The European Commission has given the go ahead to nearly 70 instances of state aid in the current financial crisis. However, its latest guidelines are a clear signal that this aid will come at a price. The aided banks will have to conduct a stress test to prove they are viable businesses without the aid, bear “a fair burden” of restructuring costs and take measures to “limit distortions of competition in the single market.” The requirements may even require “absorption by a viable competitor or orderly winding up,” say the guidelines. U.K. Financial Investments, representing the government’s states in the banking sector, said earlier this month it had suffered paper losses of nearly 18 billion from its investments in RBS and Lloyds, but that it was aiming to get the money back with profit.
As government authorities have been attempting to chart new regulatory territory for a post-credit-crunch world, banks have begun expressing their anxiety that the environment could prove stifling. The latest warning came on Thursday as the Institute of International Finance chaired by Deutsche Bank chief executive Josef Ackermann warned that some measures verged on financial protectionism.

Pizza Entrepreneurs Hooked On Dominos – US-FOREX.US

Forex-Publisher — Mon, 20 Jul 2009 14:46:13 +0000

It’s no secret that the recession in Britain has boosted demand for cheap thrills, whether it’s a night out at the movies or staying in with a pizza, and delivery chain Domino’s Pizza UK on Monday once again wowed market watchers with a set of strong six-month results. The recession has also led to more out-of-work businessmen trying on an apron for size and opening their own Domino’s franchise store, eager to get a slice of the company’s success while the financial sector struggles to find growth.”People being made redundant from management positions are investing in the franchise,” said Paul Hickman, an analyst with KBC Peel Hunt, who upgraded his annual profit forecasts for Domino’s UK
by 3%, to 27 million pounds , on Monday. Franchisees need 260,000 pounds up front to open their own store, and it seems that the white-collar victims of job cuts across the country have not had much trouble getting access to this kind of capital.”The caliber of these new applicants is higher than ever,” said Chris Moore, chief executive of Domino’s UK & Ireland, itself a franchisee of the American Domino’s Pizza
. “They are better capitalized.” Moore said that franchisees had invested 12.1 million pounds in the first six months of the year by opening new stores, buying out other franchisees and refurbishing their outlets.Shares of Domino’s Pizza UK & Ireland rose 4.6%, or 10 pence , to 229.50 pence , during afternoon trading in London. The company reported a rise in six-month profits of 35.0%, to 9.3 million pounds , while sales rose 11.3%, to 73.7 million pounds . The stock is trading at a price-to-earnings multiple of 18.8 times, which Hickman described as fair given Domino’s tendency to surpass market forecasts.According to a spokeswoman for Domino’s, the number of franchise applicants has risen 13% over the past six months, to 2,145. A typical number for the year is around 4,000. The franchise-only model has benefited Domino’s, which is not weighed down by a portfolio of restaurants.Franchisees are expected to be “fanatical about pizza,” according to Domino’s, which has taken to labeling these true champions “Dominoids.” That fanaticism doesn’t come cheap, however: Franchisees pay 5.5% of their annual sales to Domino’s, and add an extra 5.0% to a global advertising and promotion fund.

Brit Bank Watchdog Under Threat – US-FOREX.US

Forex-Publisher — Mon, 20 Jul 2009 11:46:12 +0000

The recent efforts by the chair of Britain’s Financial Services Authority to reposition the organization as a “tough” regulator could be in vain. The Conservative Party – currently clearly ahead of the government in the polls – is proposing to scrap the regulatory body created by Prime Minister Gordon Brown in 1997.They’re proposing to hand bank supervisory powers to the central bank, the Bank of England and create a separate consumer protection watchdog that would safeguard consumer rights. It’s broadly in line with the changes that President Barack Obama has proposed for the U.S. – giving the Federal Reserve supervisory powers over banks, and creating a body to champion consumer rights.It’s a clear swipe at the prime minister, breaking down the tripartite system of financial regulation, which is split between the government Treasury department, the FSA and the Bank of England, that he created when chancellor. The Conservatives would create a Financial Regulation Division within the Bank of England and a Financial Policy Committee similar to the rate-setting Monetary Policy Committee, which would monitor systemic risks and have the power to break up banks. It’s a significant shift being proposed that will probably lead to a tougher clampdown on the banking system. “[Governor of the Bank of England] Mervyn King has made it pretty clear what his thoughts are on the banking system. The Bank as a regulator will probably be more hostile to bank shareholders than the FSA was,” said Leigh Goodwin, a banking analyst at Fox Pitt Kelton in London. Shares in the banking sector soared after troubled American lender CIT approved a 3 billion emergency loan from major shareholders. Lloyds Banking Group
was up 7.2%, and the Royal Bank of Scotland
up 5.5%. The British government has taken on some 1.4 trillion in liabilities as it was forced to step in to rescue Royal Bank of Scotland and Lloyds Banking Group, formed through the merger of Britain’s HBOS and Lloyds TSB. The FSA’s Turner has accepted part of the blame for the bank failures taking place and has already begun to step up the supervision of banks, and has said they’re considering a range of tougher measures including more onerous capital requirements on banks with large investment banking divisions.

BA Tries To Find Its Wings – US-FOREX.US

Forex-Publisher — Fri, 17 Jul 2009 15:46:07 +0000

Will 1 billion be enough to get British Airways through a dour mix of slumping premium traffic, swine flu and staffing disputes? This was certainly the hope of investors as the beleaguered British airline announced plans to raise that amount by issuing convertible bonds and tapping funding that was set aside for its pension fund.Shares of the airline rose 3.5%, to 136 pence , as it joined Air France-KLM and Lufthansa in raising additional funds to shore up liquidity. It will raise 300 million pounds by selling convertible bonds which would be convertible to between 15 and 20% of its share capital by 2014, while the remaining 330 million pounds will be raised by taking over bank guarantees for the airline’s pension fund.Whether the amount will be enough to see British Airways through the recession is unclear – aside from the troubles plaguing the whole aviation industry in terms of falling demand and swine flu, British Airways is facing the prospect of strikes over its cost-cutting plans. It said it expects to post an operating loss of around 100 million pounds for the past quarter. The outlook for the global airline industry has continued to darken, with the International Air Transport Association announcing Thursday that business class revenue fell 23.6% in May. Airlines have responded with drastic measures – BA, for example, is looking to cut staff salaries to avoid further layoffs, and is currently said to be considering the sale of OpenSkies, a top-end airline which flies to New York from Amsterdam and Paris. Last week, ratings agency Moody’s cut its rating on British Airways
to Ba3 from Ba2, deeper into “junk” status.
Some hope is also being pinned on a merger with Spain’s Iberia, which has been in the cards for over a year now. Some observers think talks could gain pace under Iberia’s new chairman Antonio Vanzquez. However, it could follow in the footsteps of a tie up between Deutsche Lufthansa and Austrian Airlines. The German carrier on Thursday submitted revised offer terms to the European Commission for the Austrian firm.

Burberry Hopes For Potter Magic – US-FOREX.US

Forex-Publisher — Wed, 15 Jul 2009 12:47:37 +0000

Can Harry Potter star Emma Watson inject some wizardry into British fashion label Burberry? The luxury goods maker was certainly in need of a boost on Wednesday as it unveiled quarterly sales figures that disappointed an expectant market.”Expectations have been high as Burberry has done a lot to improve its business, including opening new stores and cost cutting,” said Sanford Bernstein retail analyst Luca Solca. Burberry on Wednesday reported an 8% rise in first-quarter sales to 229 million pounds, well below the previous quarter’s growth of 14%.The downturn has hit retailers across the board but the luxury sector has proved particularly vulnerable. Market research firm Bain & Company is forecasting that sales of luxury goods will fall by 10% this year globally, and won’t recover until 2012. Burberry said at the start of the year that it was cutting 300 jobs in the United Kingdom. However, those cuts won’t be enough to keep the company’s margins stable thanks to choppy demand, says Solca, who has an “underperform” rating on the stock. But Burberry’s new advertising campaign featuring Watson, the nineteen-year-old who plays Hermione in the Harry Potter film series, could help bring a younger audience to the brand. “Burberry has an older audience than most people expect, so they are trying to rejuvenate the brand and bring it to a younger market,” said Solca.The Watson campaign kicked off last month, with ads featuring the smokey-eyed youngster wearing variants of the iconic Burberry trench coat and an oversized bag hooked on her arm.
Shares of Burberry
fell 1.5%, or 6 pence , to 421 pence in London.

Deflation Vs. Disinflation – US-FOREX.US

Forex-Publisher — Tue, 14 Jul 2009 14:46:21 +0000

A big slide in the rate of British inflation might have looked worrisome on Tuesday if signs of deflation are what’s spooking you-but there may be little need to fret. U.K. consumer prices fell to 1.8% in June, below the Bank of England’s target rate of 2% for the first time in nearly two years. But that doesn’t mean the British economy is on the road to deflation, according to Howard Archer, U.K. economist for think tank IHS Global Insight.
Though there has been plenty of price cutting by British retailers in an effort to lure shoppers, that’s more a sign of disinflation than deflation. “We’ll see consumer prices dipping below 1% in September, but they’ll edge up a bit after that,” he said.
When Wal-Mart cuts prices, and even takes a hit to its margins in order to lure shoppers out of their homes or away from a rival like Target, that’s disinflation. It’s temporary, as prices are bound to head back up once shoppers start hitting the aisles again or once a competitor is knocked out of the space. Deflation would be a more permanent, spiraling phenomenon, marked by broadly falling prices for raw materials, falling wages and sharply declining prices for consumer goods.Deflation has been a buzzword for many British economists for the last few months as prices have fallen in the wake of the recession. But falling prices in the U.K. are only given a veneer of deflation, says Archer, thanks to sharply lower mortgage interest payments from a year ago. He calls that “artificial deflation.”Prices should also come to be supported later in January when the British government increases the national rate of value-added tax to 17.5% from 15%, after having lowered it to stimulate consumer spending.
The inflation data reinforces the notion that the Bank of England can afford to keep interest rates at 0.5% until next year, although it has the option to fight deflation and stimulate growth with its asset-purchase program, a form of quantitative easing.
Assuming oil prices don’t drastically fall and the British economy improves, worries about deflation in the U.K. should become a thing of the past.