Finding positives amid the corporate gloom unsheathed by three FTSE100 big beasts, HSBC, BP and Whitbread, is extraordinarily difficult.
All these companies have been stalwarts of the stock market for decades, reliable dividend payers which support pensions and investment funds. Each is suffering badly from the pandemic and seeking to build resilience. Market values have tumbled and moderate earnings will also impact the public finances.
When BP was throwing off billions of pounds of profits each year, motoring groups would complain vociferously. The reality is that BP, as one of the UK’s biggest taxpayers, has been a big contributor to public services as have unpopular fat-cat bankers.
Gloom: Not only has government spending climbed at an alarming and unchecked rate this year as a consequence of coronavirus, but revenues also are suffering
Not only has government spending climbed at an alarming and unchecked rate this year as a consequence of Covid-19, but revenues also are suffering.
The Government has sacrificed business rates and VAT in the hope of keeping retail and hospitality firms alive. Over the longer term some of the tax losses being built by the biggest companies could lower the revenues for HMRC from corporation tax for some years to come.
Eliminating the 2020-21 borrowing needs of the UK, heading towards £400billion this year, is going to be a horrendous task.
BP chief executive Bernard Looney is riding two horses. Along with peers, BP is suffering from the catastrophic fall in energy demand and a current $40-a-barrel price for Brent crude. At this price, the group is able to eke out a small underlying profit of £100m. After a £5.2billion loss in the second quarter, inflated by write-downs, that is a relief.
Looney, appointed in February, is also riding climate change. He has set ambitious targets to cut oil production 40 per cent by 2030 and make up the difference with wind power and solar. In spite of all the talk of environmental, social and governance (ESG) investing, the market is less than convinced.
Perhaps it is because BP has always been better at exploring and extracting oil than its cohorts. Abandoning competitive advantage for something that is still intangible has produced a credibility problem. That may be why BP shares are selling at a huge 40 per cent discount to book value compared to the granddaddy of drilling, Exxon Mobile, which trades at a 75 per cent discount. BP’s heavily hit share price means that even after cutting the dividend the shares still yield an enticing 8 per cent.
You have to think that the pessimism is way overdone.
BP is joined down in the doldrums by Britain’s biggest bank, HSBC.
Its turnaround plan largely consists of cutting exposures to slower growing markets in the US and Europe and refocusing resources on the Pacific. The 36 per cent decline in third quarter profits still meant it made £2.4billion of earnings, assisted by cost cutting, strong fixed interest trading and lower than expected bad debts. But with the shares at a 25-year low, chief executive Noel Quinn and chairman Mark Tucker have hardly covered themselves in glory. The main worry is geo-political. By aligning itself with Beijing over Hong Kong’s new security law, it won few friends in the West.
It wouldn’t be so bad if it hadn’t annoyed China too, over the US investigation into Huawei. But given the way China has pulled out of the pandemic slump, and Hong Kong has managed the Ant Group float, it is hard to question HSBC’s decision to stick with what it knows best.
It has history on side.
No UK company is more exposed to hospitality than Whitbread and it shows with its nasty half-year loss of £725m.
Remarkably, chief executive Alison Brittain is not down in the dumps and the Premier Inn-owner remains cash-flow positive with low occupancy rates. More lockdowns would be the problem.
In a display of bravado, Brittain is taking the purple emblem of Premier Inns deeper into the no-frills German market, snapping up 15 more hotels, bringing its exposure up to 70 and making it a real presence in a fractured sector. There are Travelodge leases in the UK to be snapped up too.
With £3.3billion of liquidity, Whitbread is equipped to withstand and bounce back from the virus. But it needs pandemic hawks to recognise the immense economic social costs of closures and lockdowns.