BUY: Bloomsbury Publishing (BMY)
Shares in Bloomsbury Publishing were on the fly on results day, as the publisher’s interim figures outstripped market expectations, writes Mark Robinson.
Intuitively, you might expect that the company’s consumer division would benefit from a general increase in demand for electronic and print media during the pandemic, and 17 per cent top-line growth in the consumer division would seem to bear this out. Yet there were positive outcomes across the various business segments, demonstrated by a 47 per cent increase in sales for Bloomsbury Digital Resources.
It is perhaps ironic that some of the publisher’s most successful titles this year have explored contemporary attitudes towards race, gender and privilege, when its star author JK Rowling is being hauled over the coals by some opposed to certain viewpoints expressed by the creator of the Harry Potter series.
None of this seems to have put a dent in demand, with UK print sales of Harry Potter books increasing by 8 per cent between mid-July and the end of September.
Consensus gives earnings per share of 6.4p for February 2021, rising to 12.41p in full-year 2022.
Prospects for the second half, in which earnings have historically been weighted, are favourable on the back of a strong roll-out of titles, including the latest effort by the increasingly popular Sarah J Maas. That confidence is implicit in the company’s return to cash distributions following the issue of equity in lieu of the 2020 final dividend, leading to an implied yield of 2.8 per cent.
SELL: BP (BP.)
BP scraped into profitability in the third quarter of the year, but has warned of further difficulties ahead, writes Alex Hamer.
The oil major has already slashed its dividend and spending this year and in the three months to September it did not see the trading boost that had helped its earnings in the previous quarter.
Headwinds for the period included weaker refining margins, lower gas prices and lower overall demand for its products. The company, trading at record lows, said Covid-19 would continue to contribute to a “volatile and challenging” trading environment.
BP recorded an underlying replacement cost profit (its preferred metric) of $86m, well ahead of consensus estimates. This was also up on the June quarter’s $6.7bn loss given the lack of major write-offs and higher oil prices. The company had a break-even point of $42 per barrel in the quarter, not far off the oil price in recent weeks. The upstream and downstream divisions saw improvements on the June quarter while Rosneft losses widened.
The quarterly dividend is 5.25 cents, in line with the new level announced in August.
Chief executive Bernard Looney said cuts to capital spending were progressing as expected, with 2020 guidance, excluding acquisitions, maintained at $12bn and 2021 forecast at $13bn-$15bn with inorganic spending included. Layoffs and redundancies totalling 10,000 jobs are expected to cost $1.4bn this year and the next, with the majority of that cost coming in 2020.
The company’s buzzword for the September performance was “resilient”, with Mr Looney and finance chief Murray Auchincloss letting few sentences go by without it in the earnings call. We agree, but still don’t see much joy for shareholders in the coming months.
HOLD: HSBC (HSBA)
HSBC promised shareholders that the board “will consider whether to pay a conservative dividend for 2020”, writes Alex Newman.
HSBC was forced by the Bank of England to halt its quarterly payout this year, as the Covid-19 pandemic’s effects on the UK economy began to dawn on regulators. That almost all the lender’s profits are made in Asia — reported pre-tax profits of $3.2bn (£2.5bn) from the region actually surpassed the group level in the third quarter — was of little concern to the Prudential Regulation Authority, the BoE arm charged with overseeing UK-headquartered banks’ capital.
So while a return to distributions would also factor in 2020 results and a call on the economic outlook early in 2021, the mention of a “regulatory consultation” sounded more like a promise to lobby on behalf of those investors — many of them Hong Kong individuals — who hold the stock for income.
Given the backdrop, quarterly numbers could hardly have made a better case for the bank’s financial resilience. Common equity tier one (CET1) capital ratio — the proportion of equity capital against total risk-weighted assets — shot up 60 basis points in the period to 15.6 per cent, thanks to a fall in the denominator, good capital generation and positive currency effects.
Expected credit losses increased by $785m, lower than the same period in 2019, four-fifths below the level of provisions booked in the second quarter and short of consensus analyst forecasts of $2bn. The figure also came in toward the bottom of the lender’s own forecast range, set out with interim results in August, that second half provisions could rise by between $1.1bn and $6.1bn.
That estimate was dependent on the scale of changes to HSBC’s outlook, though the bank now “assumes that the likelihood of further significant deterioration in the current economic outlook is low”.
A seemingly greater threat is posed by central banks, and not for the reasons already mentioned. The effects of further interest rate reductions led HSBC’s net interest margin to contract by a further 13 basis points in the quarter to 1.2 per cent, and are expected to intensify further net interest income headwinds in the fourth quarter. Even the world’s largest commercial lenders must yield to monetary policy.
What the bank can control, however, is the speed and scale of its much-trumpeted transformation programme. HSBC now believes it can beat targets to reduce gross costs by $4.5bn and reduce risk-weighted assets by $100bn by the end of 2022. Achieving the former will require more than $6bn in one-off costs, while the latter looks set to increase the focus on Asia even further.
Arguably, this should strengthen the bank’s hand in any dividend crunch talks with regulators, who face an unenviable task of enforcing capital prudence without risking a permanent increase in lenders’ cost of equity. Such unintended consequences would work directly against another of the central bank’s statutory objectives.
Still, indications that the dividend will be “conservative” and rebased in line with battered expectations for a global economy suggest some sort of compromise is reachable. Increasingly, HSBC resembles a corporate with the wrong legal address. Finding a solution to that anomaly is likely to take several years, but in the near term, it probably makes sense for the regulator to adopt a tactic of appeasement.
Chris Dillow: Inflation’s small danger
How big a danger is rising inflation? This is one question the Bank of England’s monetary policy committee will discuss next week.
Given the huge uncertainties about the path of the pandemic, it is futile to provide numerical forecasts. What we can do, though, is consider some of the mechanisms that might move inflation next year.
You might think that one of these is simply that the Bank of England has been printing money. This increase in the money stock, however, is more or less matched by increased demand for money as cautious savers and financial institutions seek liquid assets as protection against uncertainty.
In fact, there are two disinflationary factors.
One is that unemployment is likely to rise a lot. Although chancellor Rishi Sunak increased employment subsidies last week, this came too late to prevent some job losses and his measures do nothing to promote job creation — which is essential to merely stabilise joblessness. Higher unemployment tends to reduce inflation not just by holding down wage growth but by depressing consumer demand.
Also, uncertainty itself holds down inflation.
On the other hand, though, there are reasons to expect inflation to rise.
One is merely administrative: the cut in VAT on the hospitality sector will end in January.
Others, though, are more fundamental.
We’re already seeing one. The nascent upturn in China is raising raw materials’ prices: the S&P GSCI index is already 60 per cent up from April’s lows. This will gradually raise costs and prices in the UK.
Also, it’s possible that high unemployment won’t do much to hold down inflation, because there’ll be a mismatch between the jobless and the vacancies that are available. Unemployed waiters and baristas won’t quickly become (say) customs officials, which means wages of the latter won’t be bid down.
What’s more, the swath of business failures we will continue to see are themselves inflationary simply because they reduce competition and so increase the (local) monopoly power of the survivors: the more coffee shops close, the less reason there is for their surviving rivals to hold down prices.
On top of all this there is a Brexit effect, the magnitude of which is still uncertain. The problem here is not so much higher tariffs but non-tariff barriers — the cost of complying with customs regulations which would raise transport costs. HMRC has estimated that, if we leave the EU without a deal, these could add £15bn a year to companies’ costs — equivalent to 0.7 per cent of pre-pandemic GDP. Some of these could be passed onto UK customers. Also, new VAT rules might deter some smaller European sellers from selling into the UK market — which would diminish competition and hence raise prices.
You don’t therefore need to panic about the effects of “printing money” to suspect that inflation might rise.
History, however tells us not to worry much. Since the early 90s, CPI inflation has been reasonably stable despite huge swings in sterling, commodity prices and economic activity. Which tells us not to expect a very sharp rise.
Even if it does rise next year, then, inflation is not a huge danger. The Bank of England is therefore right to focus more upon supporting the economic recovery.