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Seven days: 20 July 2018

A round-up of the biggest business stories of the past week
July 19, 2018

Toothless regulator?

FRC restricts share sales

There are many lessons to be learned by shareholders and regulators from the collapse of Carillion (CLLN). For the Financial Reporting Council (FRC), one of the most important seems to be the need to tighten guidelines around share bonus schemes. In its 2018 UK Corporate Governance Code, the regulator has said executives of listed companies must hang on to share awards for at least five years before selling them. However, the new regulations aren’t compulsory – companies must “comply or explain”. Other provisions include better employee engagement, and – when a fifth or more of votes are cast against board recommendations – companies must outline how they plan to consult with shareholders about the result.

 

UK's Tempest

Jet unveiled

Defence companies including UK behemoths BAE Systems (BA.) and Rolls-Royce (RR.) are working to develop the UK’s planned new fighter jet. A model of the Tempest was displayed at the Farnborough Air Show this week. The UK government is investing £2bn in the project, according to defence secretary Gavin Williamson, and it is expected to be flying by the year 2035. The UK is not involved in the latest fighter programme between France and Germany, but Mr Williamson said he wasn’t adverse to forming such a tie with other nations.

 

Long road back

Automotive sale

As part of a lengthy rehabilitation following a management overhaul and heavy pre-tax losses last year, Telit Communications (TCM) is selling its automotive business to Hong Kong-listed TUS for $105m. Telit had already said that it was considering the future of product lines that didn’t necessarily fit with its long-term strategy. Cash from this sale will help reduce debt and strengthen Telit’s cash position. The past few weeks have been mixed for the group; in June, it lost an AGM vote to re-elect chairman Richard Kilsby, while earlier this month we learnt of a civil claim being brought against Telit in Italy. However, half-year trading revealed double-digit sales growth and “stabilised” gross profit margins.

 

Rate rise doubt

Inflation static

Will the UK base rate rise be pushed out yet again? Inflation remained static at 2.4 per cent in June, below the 2.6 per cent analysts had expected from the recent rises in the oil price. However, transport costs were offset by a reduction in food, clothes and recreation prices, according to the Office for National Statistics. The Bank of England’s monetary policy committee – which sets rates – meets on 2 August to decide whether economic conditions warrant a rise in UK interest rates. An increase on the 0.5 per cent rate had been expected in May, but was voted against due to weaker retail and mortgage approval data.   

 

Debenhams' insurance quandary

Insurance coverage questioned 

Shares in Debenhams (DEB) tumbled this week before retracing slightly, on weekend reports that some credit insurers were tightening their terms for the department store’s suppliers. The Sunday Times said Euler Hermes – one of the dominant insurers – has reduced cover “dramatically” for suppliers to Debenhams, and competitors Atradius and Coface have apparently recently refused to cover new shipments. Debenhams responded by saying that its cash position was healthy and that it had maintained a “constructive relationship” with credit insurers to its suppliers. IC sell tip Debenhams has issued multiple profit warnings during the past year.

Exit barriers removed?

FCA reviews platform providers

Asset gathering gaint Hargreaves Lansdown (HL.) took a knock after the Financial Conduct Authority unveiled proposals to ban exit fees for investors wanting to switch investment platforms. The regulator found that of the customers that had switched online fund and stockbroking providers, 11 per cent had experienced difficulties. Meanwhile 90 per cent of customers choosing a provider without the help of a financial adviser were not aware they would pay exit fees. Hargreaves – which controls 40 per cent of the market – may find its 95 per cent customer retention rate eroded if customers find it easier to switch providers, given it earns £473 for every £100,000 of customer funds – more than twice that of soon-to-be publicly listed rival AJ Bell.

 

RPC tightens belt

M&A slowed 

Were the short-sellers right about RPC (RPC)? The plastic packaging manufacturer announced that the deterioration in its share price during the past three months, combined with differing shareholder views on the appropriate level of leverage, was constraining its ability to pursue M&A opportunities. The heavily acquisitive group – and the 11th most-shorted stock in London – has faced criticism from some investors that it had used bolt-on purchases and aggressive accounting to mask deteriorating cash flows. The group reported 6 per cent revenue growth during the three months to June.

 

Chart of the week

High expectations can be very easy to disappoint. Netflix’s (US: NFLX) stonking share price rally hit an impasse this week after the video streaming group reported slower-than-expected subscriber growth. 

The group added 5.2m in net new customers during the second quarter, down on the 6.2m its executive had predicted in April. 

The shares fell 12 per cent on the day of the figures’ release (see chart). Is this a sign of things to come? Management flagged third-quarter subscriber numbers of 135.1m, with 5m global net subscribers to be gained during the quarter – below the 5.3m at the same time in 2017.