STEPHEN FRY, the comedian and novelist, once fronted advertisements for this bank with the slogan, “It is a wiser investor with Alliance & Leicester”. But anyone who has put money into the former building society in recent months is starting to look more than a little foolish.
Despite a huge share buyback programme, A&L has underperformed both the sector and the market since early April. The shares eased again yesterday after the bank warned investors that its profit margins would continue to be squeezed throughout 2004.
Of British banks, A&L is one of the most vulnerable to a correction in house prices, lacking businesses that would insulate against a crash. It has no long-term savings business such as that possessed by HBOS, or a business banking franchise enjoyed by Royal Bank of Scotland, Lloyds TSB and Barclays.
Being a pure play on residential property is an uncomfortable position right now, with interest rates forecast to exceed 5 per cent by the end of the year. Forthright comments on the delicate state of the housing market from Mervyn King, Governor of the Bank of England, have hardly helped A&L’s case.
The bank’s determination to compete on price in the mortgage market is already eating away at its net interest margin, which has tumbled from 1.68 per cent in the final quarter of 2003 to 1.56 per cent during the first three months of this year. A&L said it expected margins to narrow further this year.
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An increased share of the market — it won 4.5 per cent of net new lending in the first quarter against 3.3 per cent at the end of last year — is hurting profitability. Meanwhile the bank has admitted that costs this year will be broadly the same as last, despite announcing plans to close 15 per cent of its branch network.
For a time A&L shares carried a premium to reflect the possibility of a takeover following its aborted deal with Bank of Ireland. That premium has not faded away entirely: at 9.5 times estimated earnings for 2004, it remains more expensive than the well-cushioned HBOS.
A&L does have one redeeming feature: a dividend yield of 6 per cent. Although the payout is less than twice covered, there is little reason to suspect that the bank will cut the dividend. Hold.
Hays
HAYS today is a very different company from even 12 months ago. It has sold most of its logistics businesses, put the DX mail operation on the block and now has the feel of a turnaround success story.
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The decision by chief executive Colin Matthews to break up the company and focus on its personnel business looked risky in last year’s depressed Square Mile. But the gamble is paying off as the economy and markets pick up. There was a hint of profit-taking yesterday after the stock’s 52 per cent rise in the past year.
Only in March, Hays was cautious on the prospects for personnel but in its trading statement yesterday the company confirmed like-for-like net fee growth of between 10 per cent and 11 per cent, ahead of expectations. All the main business areas have contributed to the growth, as well as its principal markets in Britain, Ireland, Australia and New Zealand.
There has even been a recovery in permanent jobs, not just temporary placements. Usually this is a sign of rising confidence among employers and could signal margin growth ahead. If so, there is an outside chance of a re-rating, putting it close to rivals such as Michael Page.
Shareholders can also look forward to a payout of between £200 million and £250 million from the demerger or eventual sale of the DX business. The proceeds are likely to be returned through a share buy-back rather than a special dividend.
But no statement from Hays would be complete without some niggle and this time it is a problem with a £44.5 million loan to Albion, the chemicals business sold to its own management team three years ago. Albion cannot meet its interest payments and there may be an impairment charge, but an estimated £2 million impact on profits is small beer.
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In its new shape, Hays could prove a tempting target for a competitor. A takeover would be a bonus for shareholders, assuming a decent premium, but with its strong reputation in accounting and banking, it is well placed to participate in the wider City recovery. Worth a look.
Waterford Wedgwood
IT WAS not easy yesterday for Redmond O’Donoghue, chief executive of Waterford Wedgwood, to crack a smile. After last month’s shattering profit warning, the china and glassware producer had little in the way of good news for investors.
Although its plants are running at less than 80 per cent of capacity, Waterford has a stack of unsold products. At March 31, there were €320 million (£210 million) of goods sitting unsold in warehouses, a rise of €30 million on the previous year.
Mr O’Donoghue wants to make a clean sweep and has started by selling All-Clad, the American cookware business, for €205 million. But key to Waterford’s future is a rationalisation of the vast product range that it has. Only then can the company reduce inventory levels.
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While many consumer ware producers derive 80 per cent of their business from 20 per cent of their range, the ratio at Waterford is closer to 90:10. By reducing the large number of different details and colours, O’Donoghue believes he could free up €40 million to pay down debt.
Unfortunately, Waterford has yet to reap the benefits from its restructuring, which has also involved the closure of plants in Stoke-on-Trent and Stourbridge. The dollar’s weakness has hurt because its costs are mainly in euros, but its biggest market is the United States.
Worse still, sales have fallen sharply, tumbling 16.3 per cent in the crystal division. It needs more than a tube of glue to put this company back together. Avoid.