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Seven days: 22 June 2018

Our take on the biggest business stories of the past week
June 21, 2018

Trump retaliation

The trade tit-for-tat between the US and the People’s Republic continued to spiral this week, with Donald Trump threatening to slap 10 per cent tariffs on an additional $200bn (£151m) of Chinese goods. That followed Chinese threats to enforce tariffs on 659 US products. The Chinese commerce ministry responded to this latest announcement by accusing the US of “blackmail” and said it would “fight back firmly” against the additional measures. The dispute was sparked when Mr Trump announced plans to impose levies of 25 per cent and 10 per cent on Chinese steel and aluminium, respectively, in March.

 

Terminal decline?

Footfall dwindles

Another profit warning from Debenhams (DEB) confirms our bearish outlook on the company’s future. Underlying sales might have moved in the right direction, but thinner gross margins, coupled with worse trading in May and June, has prompted bosses to expect pre-tax profits to land between £35m and £40m this year, which compares with consensus estimates of £50.3m. That’s especially concerning as the group is already up against weak comparative figures. The shares closed the day down 11 per cent, taking the total 12-month price decline to almost two-thirds.

 

Dovish Draghi 

Expectations tempered

The European Central Bank (ECB) may have set the timeline for ending its €2.4 trillion bond-buying programme for the end of this year, but central bank president Mario Draghi confirmed the interest rate would only rise at a slow pace from September. In the previous week, the ECB announced that it expected rates to remain at record lows until at least after summer 2019. The eurozone’s dovish monetary stance contrasts with the US Federal Reserve, which increased rates by 0.25 per cent for the second time in 2018, to 2 per cent, with another two rises expected before the year is out.   

 

 

Rolls on a roll

Cash targets affirmed

After five profit warnings in four years, two annual dividend cuts for 2015 and 2016 and a freeze last year, Rolls-Royce (RR.) investors have been holding out for signs of a turnaround. They got it, after the engineering giant revealed it was on track to meet its £1bn free-cash-flow target by 2020 and pledged to double that figure in the medium term. Chief executive Warren East has also set a medium-term target to achieve a 15 per cent return on invested capital, up from 9 per cent. The news came just a day after announcing plans to cut 4,600 jobs as part of a major restructure, aimed at saving £400m a year by 2020.  

 

KPMG scolded

Under closer scrutiny

While all the ‘Big Four’ accountancy groups were criticised by the Financial Reporting Council over the level of scepticism and challenge of their audits, KPMG bore the brunt of the accounting watchdog’s damning annual review. The latter was accused of suffering an “unacceptable deterioration” in the quality of its work, which will be under closer supervision. Around half of KPMG’s FTSE 350 audits required more than just limited improvements, compared with 35 per cent last year, the FRC said. The group is also under investigation by the FRC over its work for Carillion.

 

Risers and fallers (%)

NORCROS15.29
AVEVA GROUP12.5
THE GYM GROUP11.93
ROLLS-ROYCE HOLDINGS8.94
PETRA DIAMONDS8.32
  
CONNECT GROUP-36.35
INDIVIOR-26.7
MCCARTHY AND STONE-18.52
KAZ MINERALS-14.23
ARROW GLOBAL GROUP-12.13
Week to 19 June 2018

 

Tesco bounce-back

Solid Q1

First-quarter figures from Tesco (TSCO) suggest that wholesaler Booker is already proving a nice addition to Britain’s largest supermarket chain. Group like-for-like sales improved by 1.8 per cent, while underlying sales at Booker shot up by more than 14 per cent. That 1.8 per cent growth rate exceeded last year’s 1 per cent improvement, despite disruptive snowfall in March this year. It also marks a tenth consecutive quarter of improved sales for the group as it continues to make its way back after a high-profile accounting scandal in 2014.

 

Buy and build stumble

CMA opens review

Rentokil (RTO) has been a prolific acquirer of smaller peers across its global markets during recent years. However, its merger with Cannon Hygiene has run into regulatory trouble. The Competition and Markets Authority (CMA) has raised concerns that the merging of the two companies may lead to “very limited competition from other suppliers of washroom products and services”. Rentokil did not disclose the amount it bought Cannon for in January, but the companies are two of the top three largest in the washroom products and services business. Rentokil and Cannon now have until 25 June to propose a solution, otherwise the CMA will open a phase two investigation.