Neil Collins' Notebook

Where are the Barbarians?

BY Neil Collins   /  25 September 2020

Nobody loves UK shares. Even domestically-focused individuals are selling up and sending their savings overseas. According to the Investment Association, we have cut our holdings from 23 per cent in 2015 to just 14 per cent at the end of June, selling £13bn of British shares since the start of the Covid crisis.

It is easy to construct the bear case: government incompetence in handling the crisis has made it worse, chaos could follow a no-deal Brexit, and sterling has been weakening. Measured in dollars, the FTSE100 index has miserably underperformed every major market this year.

Pick out the bones, and it’s clear why. The index is heavy with banks, oil companies and some big, deadbeat businesses like Aviva and Standard Life Aberdeen. Both BT and Vodafone have problems which will require a lot of cash to fix, while Land Securities and British Land reflect the collapse in commercial property values.

All these stocks have taken a terrible pasting, but as a result they matter much less than they did. Only Royal Dutch Shell and HSBC remain in the top 10 by market value, with Lloyds the next bank at number 25. All the big bank shares sell at less than half their stated net tangible asset value. Even if it is a racing certainty that they will have to make massive extra provisions against loans this year, their shares are far below the real value of their assets.

So what? First, it seems unlikely that the FTSE100 will continue to underperform, now that the dinosaurs have fallen so far down the league table. And whisper it quietly, but there might just be some bargains there. In New York, private equity has more money than it knows how to invest – $47.6bn according to data crunchers Preqin. This is not to be confused with the $13.5bn raised in the first half of this year for special purpose acquisition companies, which sound to the uninitiated like a modern-day version of the South Sea Bubble.

Currently, most of this money is looking for the Next Big Thing in technology, but there may not be enough big things to go round, or the prices may get even more elevated than they are today.

Those British dinosaurs will not offer the same excitement, but some of them are more valuable dead than alive. Both BP and Shell are committed to spending billions going green, while their shareholders pay. Only the managements believe their businesses are immortal, and both companies have broken trust by slashing the dividends.

Or how about Imperial Group, still 31st in the FTSE, having sacrificed the dividend after failing to diversify away from smokes? Some latter-day KKR, armed with private equity billions, might find a replay of Barbarians at the Gate far more lucrative than tilting at tech windmills.

Here is the letter that you can imagine the head of Heathrow would like to write to the Secretary of State.

To: Secretary of State for Transport

Dear Grant Shapps,

I’m sorry to bother you at this difficult time, what with re-nationalising the railways and demands for money with menaces from the airlines, but I wonder whether you could encourage a little adjustment that is not a request for money. Yes! A letter without a plea for a bailout! I thought that might grab your attention.

As you know, Heathrow airport is not prospering. Our lenders have already waived covenant rights, and between ourselves, there is a distinct possibility that it might go bust if passenger numbers do not pick up pretty soon.

But we must look ahead, so I am writing about our plan for a third runway. You may think we hardly need both of them at today’s traffic levels, but the years we have spent agonising over it have run up quite a pretty bill, even though nothing has actually been built.

That irritating fellow Jock Lowe – I’ll come back to him in a minute – has disclosed that the Civil Aviation Authority will allow £550m to be added to the airport’s regulated capital base. This would mean still higher landing fees and fares, and while it might push some airlines over the edge, it would be jolly helpful to our shareholders.

True, those owners (including Ferrovial of Spain, the Qataris and the British Universities pension fund) have paid themselves £4.5bn in dividends and allowed Heathrow to run up vast debts building vanity project terminals, but that money is gone.

Besides, in the scheme of government spending nowadays, £550m is no more than a rounding error. For that money, people might expect an actual runway rather than than a vast lawyers’ bill and some distinctly dodgy plans, but it just shows how out of touch the public is with costs in the real world.

Oh yes, Jock Lowe. He heads a group which wants to extend one of the existing runways so planes can take off and land at the same time, and which would cut early morning noise over west London. We’ve used every device we can think of to shut him up, but he’s still at it. Irritatingly, safety experts have cleared the plan for take-off, and of course it is far cheaper than anything we have come up with.

This argument may be one for another day, and another Secretary of State, but you should expect trouble from the usual suspects. If the CAA really does allow that £550m to be put on the customers’ bill, the awkward squad will ask whether the shareholders should stump up after they helped themselves to so much. You can always argue that it is nothing to do with you. Best of luck with that.

Yours sincerely
John Holland-Kaye CEO, Heathrow Airport.


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