Economic review

From regulatory relief for large pub companies to bank bail-outs and rising property prices, M&A analyses the UK economy by industry sector

From regulatory relief for large pub companies to bank bail-outs and rising property prices, M&A analyses the UK economy by industry sector

From regulatory relief for large pub companies to bank bail-outs and rising property prices, M&A analyses the UK economy by industry sector

Construction & Materials

Shares in Caterpillar, the globe’s biggest construction and mining equipment maker, have wriggled higher on Wall Street on news that it sees ‘encouraging signs’ of economic recovery.

Caterpillar, buoyed by the recent reduction in its international workforce, unearthed stronger than predicted profits of $404 million (£245 million) for the third quarter. Admittedly, these were down 54 per cent on a year earlier, on sales reduced by 44 per cent to $7.3 billion.

‘We are pleased with this quarter’s profit, given the severe economic environment,’ said chairman and CEO Jim Owens, who believes the third quarter ‘marked the low point for Caterpillar sales and revenues in what has been the toughest recession since the 1930s’.

Now, Caterpillar sees sales and revenues increasing by between 10 and 25 per cent next year, with Owens ‘seeing encouraging signs that indicate a recovery may be under way’, though he qualifies this by noting that ‘there is uncertainty about the timing and strength’ of the upturn.

Meanwhile, in London, international ground engineering specialist Keller has caught the eye of investors, with its shares having surged from a 52-week low of 402p to north of £7. In its latest positive update, the company, which has performed creditably throughout recent downturn in many of its markets, said it was beefing up its presence in South-East Asia through the £53 million acquisition of fast-growing, Singapore-based contractor Resource Holdings.


Reverberations from the state bail-outs of troubled banks are continuing to shake the sector. Lloyds Banking Group and Royal Bank of Scotland, in which the government has controlling stakes, face the prospect of having to sell off large chunks of their branch networks to comply with European Union competition rules.

Lloyds also has been selling off some of the assets it acquired as part of the purchase of HBOS last year. Firstly, FTSE 250-listed investment management firm Rathbone Brothers has agreed to buy the Bank of Scotland investment management division, which manages almost £1.3 billion of private client funds for 6,000 customers, for around £35 million. Earlier, Lloyds sold its Halifax Estate agencies chain to small cap player LSL, owner of the Your Move chain.

At 86p, Lloyds shares have fallen over 20 per cent from August’s six-month high, while Rathbone has put on nearly 10 per cent over the month to £915p, and LSL 30 per to 301p.

Travel & Leisure

The nation’s large quoted pub companies have breathed a sigh of relief and seen their share prices froth, following the Office of Fair Trading (OFT) decision that it is not a restriction of consumer choice for pub landlords to be forced to buy beer from the companies that own their pubs.

This agreement, called the ‘beer tie’, had been challenged by the Campaign for Real Ale (CAMRA) group, which argued that it drove up prices and was bad for smaller brewers. However, the OFT has dismissed these claims, arguing that the beer tie does not affect the competitiveness of the industry.

Simon Williams, a senior director at the OFT, says that ‘any strategy by a pub-owning company that compromises the competitive position of its tied pubs would not be sustainable, as this would result in a loss of sales. Pub-owning companies are not therefore protected from competition by virtue of the supply ties agreed with their lessees.

‘We understand that our response to CAMRA comes at a difficult time for the industry,’ he added, ‘but the evidence indicates that consumers benefit from a good deal of competition and choice within this sector.’

Another pub sector issue under examination is that of the tenant rent-setting process. Proposals from the Royal Institution of Chartered Surveyors – mainly that profits be used to determine appropriate rents and for a new code of practice – have been accepted by all parties.

City sector watchers have raised a glass to the news, with broker Numis, for example, saying that if implemented ‘properly’, the proposals will not undermine pub company profits.


Mortgage lending levels lifted over the late summer, according to the latest statistics released by trade association The Council of Mortgage Lenders (CML).

In ‘Q3’ of 2009, gross mortgage lending grew to £38.9 billion, an 18 per cent increase over this year’s second quarter. What’s more, mortgage lending in September lifted by a modest but encouraging 2 per cent compared with August – £12.5 billion versus £12.3 billion – although that lending level was still 27 per cent down on the comparable data for September 2008.

Nevertheless, the CML suggests that recent uplifts in lending could have hit a plateau. While lending and house prices have risen in recent months, they were already at exceedingly low levels due to the credit crunch. In addition, the recent lending uptick has not been as emphatic as it could have been.

‘House-buying activity is running at considerably higher levels than around the turn of the year,’ explains Paul Samter, CML economist, adding, however, that ‘it remains weak on any historic comparison and is unlikely to rise much further given the constraints the lending community faces and a still-difficult economic backdrop’.

On the whole, recent signs suggest that the credit-crunched property sector is now in gradual recovery mode. Frozen wholesale markets are beginning to thaw, freeing up funds for the largest mortgage providers to lend to home-owning hopefuls, and recent unemployment data was better than many had feared.


In an uncertain oil market, with analysts nervous about the balance of supply and demand in the USA, BP pleased the City with third-quarter profits of £3 billion. This was 50 per cent down, but well above most expectations, thanks to vigorous cost cutting.

AIM- and Toronto-quoted Cluff Gold has increased estimated resources at its flagship Baomahun project in Sierra Leone by 40 per cent to two million oz. Chairman Algy Cluff says the new resource comprises 1.1 million oz in the measured and indicated category and 957,000 oz in the inferred category.

The grades for both categories are modest – 2.9 grammes of gold per tonne of ore for the measured and indicated and 3.2 grammes a tonne for the inferred. A scoping study will determine how much is accessible by cheaper open-pit methods and how much by underground mining.

Software & Computer Services

The IT industry has now endured negative average revenue growth for a full 12 months, with recent results from the sector giants confirming the continued influence of the recession.

Compiled by Growth Company Investor’s sister publication, Information Age magazine, the Information Age Index tracks the revenue growth rates among key suppliers in the IT industry. In September, the index continued its descent, dropping 0.9 percentage points to -9.9 per cent during the month.

The European Index, which collates the revenue growth of the European subset of companies, also fell, by 1.4 percentage points to -3.6 per cent. The combined Index has now been steadily declining for 12 months in a row, while the European Index has fallen for 14 months, albeit at a slower rate. Financial reports that had a noticeable impact on the index during September include those of consultancy and outsourcing provider Accenture, whose revenues fell 14 per cent to $5.2 billion in its most recent financial quarter, and of Oracle, the computing giant whose own revenues fell by 5 per cent to $5.1 billion.

A pair of billion-dollar companies did achieve revenue growth, without which the Index would have been even lower. BlackBerry creator Research in Motion’s revenue grew 3 per cent to $3.5 billion. But so high are investors’ expectations for the Canadian company, however, that this performance was considered a disappointment. The other was US-based systems integration vendor SAIC, whose revenue grew by 8 per cent year-on-year to $2.8 billion.

Since the index was compiled, Microsoft and IBM have issued their latest quarterly results, which, respectively, revealed a 14 per cent fall in revenue year-on-year to $12.9 billion and a 7 per cent fall in revenue to $23.6 billion. The former made a distinctly gloomy commentary on the state of the economy and its own business, divulging that it remains ‘more cautious than most about the state of the world economy’, painting the economic recovery as likely to be ‘slow and painful’.

Nick Britton

Lexus Ernser

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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