Friday 24/08/18

1. In MACROECONOMIC NEWS TODAY, US/China talks end achieving sweet FA and Australia gets its latest PM

2. In UK CONSUMER/RETAIL-RELATED NEWS, there’s more evidence that the heatwave inspired spending, Fulham Shore shows that restaurants aren’t all disastrous and the Asda/Sainsbury’s merger gets closer scrutiny

3. In NEW BUSINESS NEWS, VW gets involved in car-sharing and Goldman Sachs brings its savings account to the UK

4. In INDIVIDUAL COMPANY NEWS, Alibaba sees a surge in revenues and gets a SoftBank injection while Qantas flies high

5. In OTHER NEWS, I bring you an unusual live performance and a potential new career. For more details, read on…

So the US/China talks achieve little and Australia gets yet another new Prime Minister…

US-China trade talks end with no sign of progress (Wall Street Journal, Bob Davis and Lingling Wei) shows how the mid-level trade talks between the two sides achieved b*gger all as they just repeated their respective stances and said nothing of a re-match. The saga continues…

Scott Morrison to be Australia’s next Prime Minister (Wall Street Journal, Rachel Pannett) tells us that Australia now has its sixth Prime Minister in ten years as 50-year old treasurer Scott Morrison ousted Malcolm Turnbull in a leadership coup. * SO WHAT? * The top job in Australia has been a revolving door as Morrison’s predecessors have been unable to hang on for a full three-year term since John Howard was in the hot seat in 2004-2007. Australia’s political situation runs at odds with its economy that has been on a 27-year run of economic growth, but uncertainty in the leadership has led to an inability to pass difficult legislation, which will become a problem at some stage. We’ll just have to see how this goes. If you are interested in a timeline of Aussie politics, have a look at ‘Brutal’ Australian politics behind demise of PM Turnbull (Financial Times, Jamie Smyth).

In UK consumer/retail-related news, there’s more evidence of heat helping us spend, Fulham Shore shows other chains how it’s done and the Asda/Sainsbury’s deal goes under the microscope…

Appetite for spending is boosted by heatwave (The Times, Tom Knowles) cites the latest findings by the CBI, Britain’s biggest business lobby, which show that retail sales in the year to August trended above the long-term average, with 29% of retailers saying that sales had improved versus the same month last year – which was better than the 13% expected by economists and the highest balance since November. * SO WHAT? * This sounds like reasonably good news for now, but the outlook for the year ahead was not so upbeat as retailers were expecting sales volumes and orders to flatten out as they cut back orders with suppliers at the fastest rate since October. In addition to this, employment expectations in this sector were at their lowest level since 2009.

On a more positive note, Restaurant group feasts on rival sites (The Times, Alex Ralph) shows that it’s not all nightmarish in the restaurant world as Fulham Shore, owner of Franco Manca and the Real Greek chains, reported a rise in revenues as it opened new outlets and

cherry-picked sites being sold-off by their less-fortunate former competitors. The company said it was due to a “slightly greater number of transactions” driven by changes to menus and the quality of its food. The shares were up by 6.8% on the news.

It’s boring, but I’ve got to mention Watchdog investigates £12bn Sainsbury’s and Asda merger (The Guardian, Rob Davies) as it signals the next inevitable step in the process as the two supermarkets attempt to get together. The Competition and Markets Authority is now launching an investigation to see whether the proposed £12bn merger could adversely affect consumers and small businesses that supply supermarkets. Chief exec of the CMA, Andrea Coscelli, said that “we will carry out a thorough investigation to find out if this merger could lead to higher prices or a worse quality of service for shoppers and will not allow it to go ahead unless any concerns we find are fully deal with”. * SO WHAT? * In days of yore (you know, before Aldi and Lidl rocked up in the UK), the UK supermarkets used to get investigated for precisely these reasons every few years it seemed. The competitive landscape has now changed considerably to the extent that deals that may have been dismissed years ago for concentrating too much power – like Tesco’s acquisition of the UK’s #1 wholesaler Booker – have gone ahead. Everyone and their dog are expecting something on these lines – CMA investigates, CMA advises that X number of stores need to close, “Sasda” strokes its chin and says that sounds like too many etc.etc., then the CMA says “well what about X number then” and “Sasda” mutters approval. Deal goes ahead after the requisite number of sites are sold and token concessions are made to suppliers. Job done.

In oil-related news, Saudi Aramco shelves its flotation plans and there’s an interesting alternative way to invest in fracking – water…

Saudi oil firm puts ‘largest ever’ flotation on hold (The Guardian, Martin Chulov) is a story doing the rounds today as stock exchanges around the world (but especially New York and London) had been salivating at the prospect of a partial float of the state-owned Saudi Arabian oil company Aramco – only for it to be “indefinitely postponed” due to concerns over its valuation. The valuation of the 5% stake was thought to be as high as $2tn at one stage – so you can see why the exchanges were falling over themselves to do the listing. * SO WHAT? * I think this is just noise – and possibly a negotiating tactic. Oil prices are relatively high at the moment and it looks like they aren’t going to weaken too much in the near future what with Iran sanctions and increasing costs for US frackers etc. so it means that there is less urgency for a flotation. Given that a sale of the stake was supposed to finance Prince Mohammed Bin Salman’s economic plan to reduce Saudi Arabia’s reliance on oil revenues, you do wonder why they are delaying – which is what makes me 

think this could be a negotiation tactic as it is in their interest to get on with it. Some say the delay is due to disagreement on the valuation, but I’d say that this is probably BS IMHO.

I thought that The next big bet in fracking: water (Wall Street Journal, Christopher M.Matthews) had an interesting angle on the fracking industry as it turns the spotlight on companies who support shale drillers. Fracking involves blasting a mix of water, sand and chemicals down big holes to release oil and gas from rock formations miles below he surface. This process also releases briny water that’s been trapped beneath ground and the problem frackers face is what to do with all this water. Just to give you an idea, energy consultancy Wood Mackenzie estimates that in some parts of the Permian Basin wells produce ten times as much water as hydrocarbons, so the race is on to invest in water waste disposal specialists. WaterBridge Resources is one such company and is building a network of pipelines that will transport water away from some of the area’s biggest producers. It announced plans for an IPO back in June and others are expected to go down the same road. Solaris Water Midstream is another company that is attracting investment from private equity firms and other investment management companies. * SO WHAT? * Given the likely increases in production, you can see why this area is red hot as wastewater firms are in prime position to benefit. I wonder whether this could be a backdoor way for ethical investors to invest in oil as they could argue that the recycling of waste water IS OK and look past the companies that they are helping.

In individual company news, Xiaomi, Avast and Target all report strong growth…

Xiaomi sees revenues rise 68pc in first results after float (Daily Telegraph, Matthew Field) heralds a return to form for the Chinese smartphone giant after a tricky float. These first results – the first since it went public in July on the Hong Kong Stock Exchange – showed strong revenue growth and profits of around $2bn – versus a loss in the same quarter last year. Just by way of reminder, Xiaomi makes cheap smartphones with thin margins – 8.8% per handset versus around 60% for some iPhones – but its cheap and cheerful phones have proved to be a hit in emerging smartphone markets like India. * SO WHAT? * Given the rocky ride it got to flotation, this was a much-needed performance. At one stage, the company bandied about valuations of $100bn but investors were having none of that and, in the end, the company had to settle for a $55bn valuation and postpone plans to list in mainland China. Shares in Xiaomi fell by around 20% in the lead up to the results versus where they were a month ago, but they gained on the positive results announcement.

In Avast secures strong growth in first results since listing (Daily Telegraph, Matthew Field) we see that the

company behind the world’s most popular antivirus software (AVG) reported a decent 10% earnings uplift versus the previous half year in its first set of results since floating on the London Stock Exchange in May. Revenues, the number of paying customers and average revenue per customer were all up and the company’s chief exec Vincent Steckler, said that “looking ahead, we are confident that we can continue to execute the strategy we outlined at IPO and we are on track to deliver on full-year guidance of high single-digit revenue growth, with slight Ebitda margin improvement”.

Following on from what I said yesterday about the success of up-market housing and furniture companies in the US, Target ‘hits bullseye’ with strong sales growth (Financial Times, Jessica Dye) shows the latest US retailer to announce a strong performance as it reported strong growth in digital sales and its best quarterly sales growth for 13 years! It topped its performance off by nudging up its full-year forecasts and its share price is now up by over 27.6% year-to-date. * SO WHAT? * This came after Walmart results knocked it out of the park last week and Lowe’s – the US home improvement chain – also had a good day yesterday despite downgrading its full-year sales growth forecast at the same time as announcing solid revenue growth for the quarter. If wage growth gathers pace, I would expect there to be more good news to come although it’s not all rainbows and unicorns – US department store chain JC Penney hit record lows last week and Macy’s got the cold shoulder from investors despite announcing generally positive results.

… And finally, in other news…

I love fireworks! Do you? When I lived in Japan, I saw some of the best firework displays I’d seen in my life at various venues although I think that fireworks here in the UK (especially the London ones at New Year) are catching up. They are a summer thing in Japan, so if you have a few spare minutes during the day, have a look at this display from a recent festival: Amazingly beautiful animated fireworks show Japan’s fireworks are on a whole other level (SoraNews24, Casey Baseel https://tinyurl.com/yd795r77). It’s quite relaxing to watch!

As always, thank you for reading Watson’s Daily!