Investment Management Blog - Montague Capital

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It seems that we just can’t have a measured response to company news these days, in either the size or direction of the share price reaction.  There are very long gaps between the rare occasions when this note has anything kind to say about BT.  But the company didn’t entirely deserve the 12% caning it got yesterday for its FY08Q1 results.  All major quoted companies spend far too much time already spoon-feeding “analysts” with regular updates so that “market expectations” conform to the end results in due course.  Unless a company has deliberately misled “analysts”, why should it be held to account for their inability to take accurate dictation?  But of course it was entirely BT’s fault that the “analysts” hadn’t understood that currency movements might have had (and indeed did) a disappointing impact on profit margins.  Negative cashflow of £734m was more worrying, but BT described how it hoped that would be a one-off.  BT has been, and always will be, a “lumpy” business as far as cashflow is concerned.  The market believes it when a bank says it has no more write-offs to make, only to make some a few weeks or days later, but BT was cut no slack.  Lastly, “analysts” took umbrage at the news that BT’s pension fund has moved from a surplus of £1.6bn a year ago to a deficit of £600m.  Have they not noticed what the market has done over that period?  Did they expect the surplus to have increased?  The BT scheme has neither a better nor a worse reputation than any other large Plc, so why not mark all the rest down too just to be on the safe side?  When one puts all these individual details together, however, BT was not going to see its share price go up on the results.  But a 12% fall indicates that there are spivvier forces at work, hedge fund bulls abandoning their optimism (who’s next?) and bears sharpening their claws for the next easy victim.  New CEO Ian Livingstone has his work cut out delivering on the promise that the original FY08 financial targets will still be met.  But at least he has realised two important factors that (in public at least) escaped his predecessor’s attention.  Firstly, BT needs to invest heavily in its infrastructure if it is to harvest the huge potential benefits of the services it would like to deliver over the telephone line.  Secondly – wait for it – Livingstone intends to improve customer service.  (This ought to be an “easy win”, as in his previous role it was he was responsible for BT’s failure on that point.)  Nevertheless, BT needs a catalyst to get the market thinking in the right direction once again.  BT will be hoping that Ofcom recognises the damage being inflicted by local loop unbundling and, subject to delivery constraints, allows BT the sort of financial return that will commit it to these long-overdue initiatives.  While it’s far too early to get excited, don’t forget the name.  Every dog (eventually) has its day. 

In contrast, with a 7% rise in HBOS’ share price one could be forgiven for thinking that oil has been discovered beneath the centre of Halifax.  Instead, HBOS served up a ghastly set of results and scant suggestion of better things to come.  Even before write offs, profits fell 14%.  Deduct impairment charges (up a whopping, but almost certainly not peak, 31% at £1.3bn) and the fall in profits becomes 72%.  Look more closely at those charges and we find that they have risen from 2.03% of advances at the last published balance sheet date to 2.35% now.  Isn’t it curious how that little gem didn’t manage to make it into the rights issue prospectus?  In fact another £1.9bn of write-offs didn’t even hit the P&L – yet – but were allowed by some sneaky accounting practice to be taken directly against reserves.  “The UK’s largest mortgage lender”, as HBOS used to be proud to describe itself, saw a rise in housing-specific mortgage impairment losses from £40m to £213m.  Wonder which way that number is going to go over the remainder of the year?  (Hint: the Nationwide reported that house prices in July fell for the ninth consecutive month and at the fastest rate since it began its survey in 1991.)  The same question could be asked of corporate lending losses, which rose from 0.51% to 0.83% of the total in just six months.  If all this was better than the “analysts” had been expecting and justifiable cause for celebration, the wake won’t be long in coming.  At least HBOS had the good grace not to try to buy us off by hiking its dividend.  Instead, the interim was cut by two-thirds and will be paid in HBOS paper.  Lovely jubbly!  Nor did it try to pretend that good times are just around the corner.  Why, oh why, was any of this good news?  Will the next bank disaster please step up to the platform to collect its prize while gravity is still suspended.