Month: April 2014

Primark – London Firm American Dreaming?

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Primark announced plans for more international growth by opening stores In America. They plan to open a superstore in Boston next year along with 8 smaller stores and a warehousing site on the north east of the States. The company owned by Associated British Foods (ABR) beat analysts expectations with revenues (sales) up 14% to £2.278bn and posted operating profits of £298m. This is primarily down to the retention and expansion of the customer base, playing on the fact that the retail market (excluding high end brands) has experienced a shift from quality to value. This shift has led to the emergence of Poundland, Aldi, Lidl, but also has enabled Primark to have a solid market share and be one of the stronger performers under the ABR umbrella. This has also given Primark to expand in the E-commerce space, as they tied up a deal with ASOS to sell clothes on their platform.

Now the next big step for the company is tackling America. This is no easy feat just ask the following British stores. 
1 – Tesco’s US chain Fresh & Easy has filed for bankruptcy. The retailer has agreed to sell the majority of its US stores to Ron Burkle, lending his investment vehicle £80m to take on about 150 stores. The redundancy packages for about 400 permanent staff, the store closures and the loan being given to Mr Burke will cost Tesco £150m, taking the total cost of its failed US adventure to around 2 Billion pounds. (Source: Telegraph)
2 – Marks & Spencers got rid of US grocer King’s in 2006 to focus on its struggling operations back in Britain. Two-thirds of its investment was lost when it sold the New York based clothing chain Brooks Brothers in 2001.
3 – Laura Ashley Sold its entire US chain for $1 in 1999 after a string of profit warnings caused by over-ambitious expansion. (A profit warning is a public announcement made by companies to let people know that profits won’t be as high as expected)
What do Primark need to do to not follow down the footsteps of the above? In my opinion they first need to improve on how they are perceived by the general public. Corporate Social Responsibility plays a big part nowadays and is in some industries the only reason why customers choose company A over B. I have seen various comments across the net from different individuals talking about the unethical conditions the factory workers have to contend with which led to the Rana Plaza disaster in Bangladesh this time last year. staff were ‘told to return to work’ despite a large crack in the factory wall and this negligence led to 1,129 people losing their lives and another 3,000 injured. Something must be done to show that the lessons have been learnt and the mistakes won’t be made again to improve the perception people have on the company, especially the people that have boycotted purchasing items from any of their stores. 
Their price advantage gives them a huge competitive edge and Primark need to play on that if they want to successfully break into the US. Sound out the competition and provide better value for money. Zara, H&M and Topshop who hail from Europe have all been able to successfully break into the US fashion market so Primark will be hoping to follow in their footsteps.
Finally they need to ramp up their social media presence. With a constantly evolving market the onus is on the company to keep up to date with all technological advancements and capitalise on them to obtain a competitive advantage. Trends are shared on sites such as Instagram and Tumblr, so it needs to ensure their potential American market, which is definitely more diverse, are constantly reminded of the brand through the applications on every young persons smartphone.

let me know your thoughts? Do you think America is a step too far for Primark or do you think they will be successful?
@capitalmoments

What’s best for Tesco?

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Shareholders at Tesco have been left feeling disgruntled as the company recorded a 6.9 percent drop in profits last week. Profits at Britain’s biggest retailer have now dropped for the second year in a row after going 20 years without this happening. This has led to some calling for Philip Clarke, the Chief Executive to be replaced. Despite this the share price still rose about 7.5% primarily down to an improvement in the firms Eastern European business. Tesco shares are currently trading around the 290p mark, falling from 400p which was the share price around the time the under pressure Mr Clarke took over.

Tesco are a company dear to my heart as they provided me with a capital moment – my first job. I’m going to perform a simple SWOT analysis to provide an insight into what next for ’em.

Strengths/Opportunities
Brand – let’s face it, everyone knows Tesco. Finding someone based in the UK that has not heard of Tesco is like finding a team better in North London that’s better than Arsenal, impossible (don’t argue). Tesco has continually maintained a strong brand name in UK market, obtaining a large chunk on the consumer market share. They have grown from strength to strength, providing quality products as seen with their “Tesco Finest” range introduced in the early 90’s.
Tesco.com – The online experience on the Tesco is seamless and very straightforward. Again they were one of the first supermarkets to provide online shopping which provided convenience to many consumers, especially the elderly who were able to order essential groceries from the comfort of their own homes.
Diversification – Tesco is much more than that market stall selling groceries founded
by Jack Cohen in Hackney nearly a hundred years ago, Tesco has increasingly diversified with regards to the location of their operations and what is sold by the company. They have diversified into areas such as the retailing of books, clothing, electronics, furniture, petrol and software; financial services; telecoms and internet services; DVD rental; and music downloads.
International Growth – there is a real opportunity for Tesco to establish themselves as the global brand they wish to be. They have been able to firmly establish themselves in Central Europe, with over 80 stores in the Czech Republic, but the next stage is to break out and tap into the American consumer market. Yes they have had an unsuccessful attempt, but careful re calibration of their strategies may do the trick.

Weaknesses/Threats
The main weakness/threat that can affect Tesco is whether the firm can adapt to remain competitive on all fronts. The consumer market is undergoing deep structural changes. Customers are switching from quality to value and the big supermarkets have to adapt to this. This has affected Tesco in 2014 as the emergence of discount value stores such as Poundland, ALDI and LIDL have been contributors to the consecutive reductions in profits and an all time low market share. In an attempt to win back shoppers, Tesco launched the first wave of a £200m price cutting campaign back in February focusing on staple foods (milk, bread and vegetables) and the retailer said prices were coming down by an average of 24%. Although they cannot beat the discounted due to differing business models, they can stay close to them to ensure they are as competitive as ever and that is what they will need to do to buck the current trend of consecutive reduction in profits.

The economic recovery – UK employment

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On Wednesday the Office of National Statistics released information which can be seen as an indicator to how the British economy is faring. The unemployment rate of the economically active population is now 6.9%, the lowest since 2009 and the number of people in work is 30.39 million. The number of people out of work fell by 77,000 to 2.24 million in the three months to February.  The jobless figure for 16 to 24-year-olds fell by 38,000 in the three months to February to 881,000, the lowest for five years (source BBC business).

What does this mean in reality? In a perfect scenario everyone would be employed, earning money living happily ever after – however their are a finite number of resources and jobs available. There has been a mindset shift amongst individuals where they are now content with doing a diverse range of jobs than just their preferred role which was over saturated with respect to the number of applications received for each individual job opening. A reduction in the number of unemployed individuals is definitely positive for many reasons. Being able to provide for ones self provides a psychological sense of independence, which should* lead to improved morale and long term productivity. Productivity is an interesting one however because it’s not the easiest variable to measure – a traders measure of productivity would be completely different to a cleaners appraisal.

A reduction on the number of unemployed individuals in the UK also has an impact on the amount of benefits claimants. The claimant count – the number of people claiming Jobseeker’s Allowance – fell by 30,400 to 1.14 million in March. This is positive as benefits are essentially paid by government through the income generated primarily through taxes and spending cuts so the less benefits paid by the government, the more money saved which could be to reform the economy.

Also the Gross Domestic Product / Gross Domestic Income of the UK will increase. The higher the GDP, the healthier the country is economically, so this is definitely a positive sign for Britain. Youth unemployment however is still an issue. Although the amount of 16-24 year olds without work is decreasing, the youth unemployment is worryingly high at nearly 20%. Curbing this is a priority for Labour Government if they win the next general elections – under their Jobs Guarantee plan, 18 to 24-year-olds out of work for a year will be offered a taxpayer-funded job for six months – with those who refuse losing benefits.

In conclusion there is still a lot of work globally that needs to be done to fully recover from the aftermath of the financial crisis but the signs definitely good for the UK, considering parts of Spain still boast of unemployment rates of around 26%. Continued and stable progression should be the aim, with the low interest rates remaining low for the considerable future, companies can afford to borrow more to expand their operations and hire even more people who are out of work.

Make sure you follow @capitalmoments big things coming very soon.

*This is my assumption and cannot be taken as a scientifically proven theory – it makes sense though right!

Your having a Property Bubble mate

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Properties in London on average now cost double the amount of a property anywhere else in the UK. According to figures from building society Nationwide, the difference in buying the average home in London and outside London is a staggering £183,000. The ‘London premium’ has grown so extreme that you don’t even have to move that far out of the capital to get a lot more space and value for your money and young people are finding it harder than ever to purchase their own properties. Annual house price inflation hit 9.5 per cent in March, which is the the biggest year on year jump for almost 4 years. London property prices soared 18.2 percent higher to an average 362,699 pounds compared to last year. The average house price in London is expected to be 500k by the end of the decade!

I know the question on everyones lips is WHY? Lets start off with this statistic.  In January, London was named the city with the best real estate investment opportunities for foreign investors, overtaking last year’s first choice New York  by the Association of Foreign Investors in Real Estate (AFIRE). 
The demand for properties in the capital is as high as its ever been. Current residents within the capital are looking for places to move out of their parents houses, but have to compete with foreign investors who are looking to take advantage of how easy it is to invest, due to no restrictions being imposed on overseas investments, simplified taxation regime and the capital appreciation properties in London provide. Also because of the diversity of the residents within the capital it attracts a lot of European, Middle Eastern and Asian money.  Last year  85% of new houses in London were sold to non-UK buyers, with investors from east Asia driving demand and nearly 50% of all properties bought with a value of £1 million or more were bought by investors who do not reside in the UK. Investors are flocking to property shows across the globe in which property developers are using to market their new builds and successfully so – houses are snapped up off-plan, discounted in cash creating a win-win scenario for both parties. 

Another contributing factor to the housing bubble that we have on our hands is the current state of the economy. The Bank of England base rate set at 0.5% which has not really given the incentive for your average geezer to put his Uncle Bens (£10) in an ISA which wouldn’t generate him much… therefore more risks have been taken, with people realising the strong yields that can be realised from buy-to-let properties, especially now with extra low mortgage repayments. On average there have been around 75,000 mortgage approvals a month over the last few months across the United Kingdom (coincidentally it did dip to about 70,000 in February as a result of the aftermath of the floods which affected many parts of the UK). There is definitely more confidence in the property market, although that being said mortgage approvals are still short of the 90k average pre the 2007 crisis – cautious optimism perhaps?

With the above factors taken into consideration, the future for Property prices in the short, medium and long term is certainly a topic of interest…that is if the Bank of England do as predicted and increase the base rate to 2%. One could also question the effect it will have on not just Londoners, but the UK in general. Will the bubble burst? Will the market confidence be short lived? If so, will you be able to capitalise and make money from it? only time will tell….. Now all those lectures my parents have given me make sense

@CapitalMoments

 

Seplat – Kini big deal?

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Oil and gas firm Seplat Petroleum Development Company PLC on the 9th April priced its initial public offering at 210 pence a share, giving it a market capitalisation of £1.14 billion. The firm will be raising just over £300 million from the Initial Public Offering to find and develop new acquisitions, along with the repayment of a $48 million shareholder loan from MPI SA (formerly known as Maurel and Prom SA who are a french based Oil Production and exploration company). The CEO of Seplat mentioned their strategy is based on the three criteria:

  • organic growth
  • gas development 
  • acquisitions due to multinational companies divesting their assets in Nigeria

 

Seplat have recorded consistent year on year growth under the guidance of chairman Mr A.B.C Orijako and have now become one of the leading indigenous independent Oil and Gas producers residing in Nigeria. They have almost trebled the amount of oil they produce per day to the amount of roughly 51 thousand from 14 thousand in August 2010 following the purchase of 3 oil blocks from Royal Dutch Shell. 

 

Their growth has shown in their financials – For the year ended 31 December 2013 Seplat reported Revenue of $880 million, a year on year increase of 41%. Operating profit increased $149 million to US$479 million. Their EBITDA/Sales ratio of 54.4% for 2013 is nearly 12% over the benchmark average EBITDA/Sales ratio of 400+ Oil and Gas producer firms across the world.  (Benchmark Source : http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html). SEPLAT’s net debt as at 31 December 2013 was $141 million – a very manageable amount considering the consistent profits the form have recorded. 

 

Another factor which works in the favour of the company and is driving their success is the fact that they are a home grown company. Historically Nigerians would rather do business with indigenous businesses due to the strong cultural values they tend to have which include the association with community and family cohesion. This can definitely go a long way in assisting the firm in its pursuit for continuous growth. 

 

However with every pro, there’s a con. What risks face Seplat you may ask? Firstly and probably most importantly it is the issue which has plagued Nigeria for a very long time, an issue which I alluded to in a previous post highlighting the fallout between Sanusi and the Government – yes it’s theft. This is one of the main reasons why major oil companies have been retreating from their business operations in the country. Royal Dutch Shell lost nearly $1 billion through theft and various disruptions to its Nigerian oil and liquefied natural gas (LNG) operations in 2013 (Source: Reuters).  This organised crime, otherwise known as oil bunkering is amounting to between 7-10% of the country’s total output and is creating a very lucrative black market so Seplat need to ensure more is done to eradicate this problem as this could potentially have more of an impact on revenues in the future.

 

Seplat became the first firm to have dual listing on both the London Stock Exchange (LSE) and Nigerian Stock Exchange with the price of a share through the Nigerian Stock Exhange equating to N576, roughly $3.52 per share. This made the firm the highest priced firm in the Oil and Gas sector in the exchange miles ahead of Total Nigeria which is trading around N173. The performance of the stock in the short term would depend on the strength of the NSE and whether the geopolitical and currency risks which have enslaved the country for so long will continue to have an impact just like how the Sanusi fallout caused the Nigerian Stock Exchange all share index to lose value mid February, however long term I feel this stock has fantastic potential looking at the numbers and it’s strong and efficient business model

 

@capitalmoments

Poundland – Value, quality or both?

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A few weeks ago the first single price store in Europe had an Initial Public Offering on the London Stock Exchange. Poundland became a public company with an opening share price of 300p per share. There was a lot of demand for the shares even though it did not have the hype or the status as some of the other major banking deals that happened in the first quarter.

The company, which has more than 500 stores across the UK and Ireland, completed its £750 million flotation on the 12th of March, raising £375 million for its management and it’s private equity backers. The firm, which hails from the West Midlands was 14 times oversubscribed at its floatation price of £3. This means if they had 1 share to sell, 14 people wanted it. This was primarily down to the efficient business model of the firm and the opportunity that investors saw in the firm that would continue to grow from strength to strength. This also combined by a realisation by some of the major supermarkets that consumers have now shifted from Quality to value as the economy attempts to recover from the recession. Morrisons CEO Dalton Phillips highlighted that there has been “fundamental shift in how customers view discounters” and that the company will invest £1bn over the next three years into cutting prices and improving its own-brand food range. This had a knock on effect on its competitors as £3bn was wiped off the value of Britain’s biggest food retailers.

What works well for Poundland is not only the potential mentioned above but also the business model. The retailer made underlying earnings of £45.4 million in the year to March 31, up from £39.3 million in the previous year. Revenue rose to £880 million which showed an increase of 15%. The company is targeting a doubling of its British stores to more than 1,000 as well as further international expansion.

Poundland so far has been a solid investment opportunity for investors worldwide. Demand for the stock drove the share price up 23% on the close of business on day 1 and is now trading around the 380p mark 3 weeks on. Do the maths – a £3000 investment would’ve returned you £800 before capital gains tax in two weeks. Pretty good right?