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Seven Days: 15 May 2020

A round-up of the biggest business stories of the past week
May 12, 2020 and Companies team

Aramco’s profits plunge

Oil turmoil takes toll

Amid the collapse in crude oil prices and a demand squeeze, Saudi Arabian Oil Co (SAU:2222) – also known as Saudi Aramco – saw its operating profit drop by almost 25 per cent to $34.6bn (£28.2bn) in the first quarter of 2020. Still, the state energy company plans to hand shareholders $18.8bn in dividends, more than the $15bn of free cash flow it generated during the period. The oil and gas giant is sitting on $13.4bn of net cash. Aramco may be adjusting to the crisis by cutting capital expenditure and production, but its share price seems detached from reality, down just 2 per cent from December’s float price.

 

Lost in space

$500m stake

Richard Branson’s Virgin Group is selling up to 25m shares in space tourism venture Virgin Galactic. This is with a view to supporting Virgin’s “portfolio of global leisure, holiday and travel businesses that have been affected by the unprecedented impact of Covid-19”. The number of shares on offer would equate to a $500m stake in New-York-quoted Virgin Galactic. Mr Branson’s broader business empire has been under pressure in recent weeks. Virgin’s Australia airline entered administration in April, while Virgin Atlantic is cutting thousands of jobs.

 

ESG: popularity boost

IFA survey

UK independent financial advisers (IFAs) have reported a “major rise” in environmental, social and governance (ESG) allocations since the start of the Covid-19 outbreak, according to investment manager Federated Hermes. Indeed, 85 per cent of 200 IFAs surveyed have seen a rise in client requests to allocate capital to ESG-integrated funds, while 82 per cent believe that the crisis and its impacts will lead more people to invest with ESG aspirations in the future. More than three-quarters think investors would be encouraged to divest from companies that did not support their employees or broader society during the pandemic.

Muddy Waters strikes again

Burford under spotlight

Burford Capital (BUR) has been hit by another report by short-seller Muddy Waters, which accused the litigation finance group of reclassifying and redefining its 2019 financials to “inflate cash receipts, operating profit” and mislead investors. The accounts, which were signed off by E&Y, were warmly received by investors when they were released last month after several delays. They also included several changes to the treatment of cash receipts, which Muddy Waters says prevents “true apples-to-apples comparisons between periods”. Burford declined to comment, although chief executive Christopher Bogart and chief investment officer Jonathan Molot bought shares shortly after the report’s publication.

 

Peloton rides pandemic surge

More exercise at home

While gyms around the world remain closed, consumers have turned to Peloton’s (US:PTON) stationary bikes, seemingly undeterred by the £1,990 and upwards price tag. The exercise equipment and media company saw turnover jump two-thirds to $525m (£427m) in the quarter ending 31 March, with subscription revenue from its fitness classes almost doubling to $98.2m. But its operating loss widened by almost two-fifths year on year to $58.4m due to the settlement of a lawsuit over music used in workout videos, investment in marketing and higher administrative expenses. Labelled “Covid-proof” and “recession-proof” by chief executive John Foley, Peloton has upped its guidance, expecting revenue for the year ending 30 June to come in 89 per cent higher at $1.72bn- $1.74bn.

 

Norway to raid piggy bank

Record fund withdrawal

In light of its “most severe setback ever in peacetime”, Norway is proposing to exceed its 3 per cent cap on spending from its sovereign wealth fund this year. As the country looks to recover from the twin blow of Covid-19 and the slump in oil prices, the government has put forward a budget that will spend NOK 420bn (£33.5bn) of its petroleum revenues, equivalent to 4.2 per cent of the fund’s value. This would entail a net NOK 382bn transfer from the fund, surpassing the NOK 258bn of cash flow expected this year. The move would therefore trigger large-scale asset liquidation.

 

Activist hits Pets at Home

Report tumbles shares

Pets at Home (PETS) has been accused by activist short seller Bonitas Research of having “lied to investors about the level of financial support given” to its joint ventures (JV). A report published on 12 May sent the shares down more than a tenth after claiming the pet supplies retailer failed to disclose £34m of trading loans used to support circular payments from its Vets Group JV. Bonitas alleges this “artificially inflated” the company’s reported profits. Pets at Home said this refers to “an historic view of operating loans to joint venture practices”, which has been addressed by new management.

 

As the Covid-19 pandemic disrupts demand for many goods and services, the US consumer price index dropped by 0.8 per cent in April from a month earlier. This represents the steepest decline since December 2008 and the second month in a row that prices have eased. Energy prices were the biggest drag, with gasoline prices tumbling by 20.6 per cent.

Food prices bucked the trend. As people stocked up on groceries during the lockdown, the cost of food at home surged by 2.6 per cent, the largest rise since 1974.

The overall fall could prove short-lived as the US economy slowly starts to reopen,staving off fears of a deflationary spiral.