Retailer's shares lose takeover froth as bank says investing in store portfolio could harm margin growth
News on Thursday that Sir Philip Green had raised some cash by selling a stake in Top Shop had the more excitable traders wondering if he would take another tilt at Marks and Spencer, having failed with a £9bn bid eight years ago.
That prompted a 1.5% rise in M&S's shares on the day of the Top Shop news, but the froth came off after Green's Arcadia company said there was no truth in the rumour. On top of that, Goldman Sachs cut its recommendation on M&S from neutral to sell, saying the retailer's strategy of continuing to invest in its capital-intensive stores as well as building up its online offering would do little for its profit margins in the medium term. Analyst Rob Joyce said:
In our view, management's decision to step up multichannel capital expenditure makes sense, but the late commitment to the model, combined with a long-term commitment to a large freehold/long leasehold store base means that the shift to online sales will not be margin accretive in our forecast period [to 2015].
Goldman said there were risks that M&S could do better than the bank expected, including "stronger-than-expected growth in UK consumer confidence, and M&A activity. A further risk is that the capital investments being made translate into profitability growth earlier than we forecast."
M&S fell 4.2p to 393.6p after the downgrade while Next dropped 8p to £37.04 despite Goldman raising its rating:
We upgrade Next to neutral [from sell] given its strong industry positioning and cash return on capital invested, driven by the growth of its profitable, capital-light, online business.
Overall, leading shares ended the week on a positive note, following better than expected US non-farm payroll figures. The FTSE 100 finished up 12.98 points at 5914.40, up nearly 50 points on the week despite eurozone and German growth forecasts being cut by the European Central Bank and Bundesbank respectively, and a bleak UK autumn statement announcement from chancellor George Osborne. Investors were also nervous about Greece's proposed bond buying programme - vital for its next tranche of bailout money - and growing political problems in Italy, not to mention the continuing US budget talks.
British Gas owner Centrica climbed 5.4p to 337p after a buy recommendation from UBS, which said the company had the strongest balance sheet of all the major European utilities:
With strong ongoing cashflow generation UBS forecast Centrica to have balance sheet headroom of £1.2bn in 2013, £2.8bn in 2014, and £4.1bn in 2015. This strength gives Centrica the attractive options of earnings accretive acquisitions, organic investment, and/or quite possibly a redistribution (likely a £500m-£700m 2013 buyback) should they not proceed with new nuclear.
Whitbread - which issues a trading update next week - rose 20p to £24.28 on hopes that its Costa Coffee business would benefit from any consumer boycot of Starbucks over the tax controversy surrounding the US-owned group. Patrick Coffey at Liberum Capital said:
Comments [from Starbuck's UK boss] would suggest that consumers in the UK are, and may continue, to trade away from Starbucks in the short term. This is positive for Whitbread's Costa brand (a fully signed up UK tax contributor). We continue to believe consensus has not factored in the growth of Costa and believe the company will upgrade their 2011 strategic targets by over 60% next year. We remain at the top of the range and are happy to be there. Meanwhile, protests at Starbucks stores are planned tomorrow by campaign group UK Uncut which will give further press coverage to Starbucks' ongoing image problems.
But Xstrata edged 6.5p lower to £10.35 on concerns its long drawn out merger with Glencore, down 0.5p to 345.2p could still be derailed by local regulators. South African utility Eskom has expressed concerns the deal could threaten its coal supplies while the mineworkers' union is worried about job cuts. Richard Knights at Liberum Capital said:
[It is] unlikely that deal will be blocked, rather that the government will be looking for assurances that nothing drastic change will come of the merger.
Tate and Lyle slipped back despite the group unveiling a pensions deal with Legal and General. The sweeteners and starches group has hedged some 43% of its total pension liabilities, with a £347m transfer of assets and cash from its scheme to L&G. This effectively buys a bulk annuity policy with L&G paying the necessary amount of benefits to the pension trustees.
With Tate also hosting a visit to its US operations, the company's shares dipped 2p to 759p while L&G added 1.1p to 147p.
Housebuilder Berkeley signalled its confidence in the market by paying its first dividend since 2008 - giving chairman and major shareholder Tony Pidgley a near £900,000 boost - while Bellway was also positive.
Berkeley, which concentrates on London and the south east, reported a 40.7% rise in half year profits to £142.2m. It will pay an interim dividend of 15p a share ahead of a larger capital return planned for 2015, news which pushed its shares up 78p to £17.28.
Meanwhile Bellway, up 1p to £10.05, said market conditions remained largely unchanged, but customers's ability to access mortgage finance had improved slightly as a result of the government's NewBuy indemnity scheme.
Finally, Apple investors had a rocky ride this week, with the iPad company's shares losing more than 6% on Wednesday - wiping $35bn off its value - with traders struggling to explain the fall. The reasons they came up with included Apple facing increased competition in China, losing market share in tablets, and fund managers taking profits ahead of proposed US capital gains tax increases next year.
The company recovered some of its losses on Thursday after a series of interviews by chief executive Tim Cook, but on Friday it fell again, down 1.5% in early trading.
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