Retail

Why the secrecy around financial terms of Covid-19 loan to Celsa Steel UK? Nils Pratley


Call it a small but significant step in the government’s Covid-19 business response: a loan has been granted to a company that does not meet the lending criteria for other support schemes.

Celsa Steel UK, Spanish-owned but operating in south Wales, is the recipient. The sum is thought to be relatively small – about £30m – but 1,000 jobs were at risk. Chancellor Rishi Sunak seems to have decided the UK steel industry must not buckle during the pandemic.

That’s the right policy, even if Celsa’s survival in the UK will offer little consolation to the thousands of workers losing their jobs in the retail, travel and hospitality sectors. Steel is genuinely different. A failure would have knock-on effects for the UK automotive, aerospace and defence sectors.

There is a quibble, however. Why the secrecy around the financial terms of the loan?

Soft conditions – restraints on executive pay, a demand to protect jobs and pursue net zero carbon targets – were mentioned. But we also need to know that the Treasury has inserted itself at the top of the tree of creditors, which is what a “last resort” rescuer of a strategic industry should do.

One might say it matters little in the case of Celsa, but Tata Steel UK is also in line for a bespoke loan under the Project Birch scheme. That loan could be as much as £500m, and the financial terms would be highly important. If Sunak wishes to present himself as a hardball negotiator on behalf of taxpayers, he should provide the evidence.

Outside-the-box caution on dividend should be encouraged

What counts as a low-risk share these days? One answer for some investors has been DS Smith – a low-profile member of the FTSE 100 index but one of Europe’s largest paper and packaging companies.

A specialist in cardboard boxes ought to be a suitably dull and reliable stock to own during a pandemic, especially when e-commerce is enjoying a boost. What possible shocks could there be?

DS Smith produced one. It said it wouldn’t pay a dividend for last year despite reporting figures that showed little sign of trouble at the (paper) mill. Pre-tax profits rose 5% to £368m in the 12 months to April. Cue much muttering among analysts and investors about overcaution in the boardroom. The shares fell 7%.

Actually, though, chief executive Miles Roberts and his board have done the right thing. The history of stock market casualties is littered with companies that have over-distributed dividends, hoping that risks won’t materialise, and come to rue their bravado. All too often, debt piles up, capital expenditure is cut, and problems compound.

In DS Smith’s case, the net debt position of £2.1bn currently looks safe-ish when judged against last year’s earnings. But the figure is still slightly above the company’s target, which is why Roberts is right to fret about trading factors that could deteriorate.

Volumes were down 4.5% in April in May; the price of cardboard for recycling has risen 200% as collection networks have been disrupted; many of the company’s industrial customers, as opposed to the likes of Amazon, are in hibernation mode. If visibility for the next six months is poor, why bother with a token trim of last year’s £220m dividend? Just cut it altogether.

Income investors will hate such conservatism, but shouldn’t. The undistributed cash still belongs to them. Boardroom caution ahead of a (possibly deep) recession is justified – in fact, to be encouraged.

It would be a mistake to draw wider lessons from Primark example

Those queues outside Primark stores clearly weren’t just there for the buzz of reopening day. The fast-fashion retailer made a remarkable boast in its trading update: sales in its stores in England, in the week before last, were stronger than a year ago. That was despite the lack of tourists and commuters.

The mistake, though, would be to draw wider lessons from the experience of a unique retailer. Primark doesn’t offer an online delivery service, so the pent-up demand factor will be stronger than elsewhere. The clothes are also as cheap as chips; the punters know exactly what they’re getting and are loyal.

So the Primark figure with real resonance is the one that pointed firmly downwards. The chain’s operating profits, reckons owner ABF, will arrive at £300m-£350m for the full year, versus £913m a year ago. If a two-thirds profits decline counts as a good-ish outcome for a retailing phenomenon, the financial pain for lesser rivals will be intense.



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