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“The financial sector came to the FTSE 100’s rescue on Monday as investors bid up shares in banks, insurers and investment platform providers. The blue chip index traded 0.1% higher at 7,353, following a similar trend seen across mainland Europe.
“In Asia, Hong Kong’s Hang Seng index advanced 0.5% after the government suspended a controversial extradition bill that triggered widespread protests,’ says Russ Mould, Investment Director at AJ Bell.
Airlines
“Shares in the airlines sector have been spooked by a profit warning from Frankfurt-listed Lufthansa. It has blamed deteriorating prices in Europe on market-wide overcapacity and rival carriers willing to accept significant losses to expand their market share.
“These factors are certainly not ‘new’ news and so the fact Lufthansa is still moaning would suggest life is getting even tougher for the airlines.
“While price cuts are fantastic news for travellers, the airline can’t sustain loss-making operations forever.
“Ryanair issued a profit warning in January citing lower-than-expected air fares. EasyJet warned in April, flagging slow summer sales amid Brexit uncertainty. And Wizz Air warned at the end of May that its profits would be lower than expected this year because of a tough operating environment.
“Interestingly, International Consolidated Airlines has managed to avoid a profit warning. Although operating profit has been declining, expectations were already very low and the British Airways owner has benefited from having more diverse geographic coverage.
“In addition to a price war and excess capacity across Europe, higher fuel prices and the 737 Max grounding have added to the industry pressures, making 2019 a miserable year for airlines.
“It has also been a miserable place for investors to park their money, as illustrated by the year-to-date share price movements among London-listed airlines. Only Wizz Air and Jet2.com-owner Dart Group have managed to buck the negative trend and deliver positive returns for shareholders.”
London-listed airlines: share price so far in 2019
International Consolidated Airlines-27%
EasyJet -19%
Ryanair -5%
Dart Group +15%
Wizz Air +23%
Kier
“Construction firm Kier’s decision to ditch its dividend should not be a shock given the company’s precarious financial position. The shares were yielding a scarcely credible 10% before this morning’s announcement.
“New CEO Andrew Davies is not stopping at just the dividend. He is taking drastic action in an attempt to avoid Kier suffering a similar fate to its doomed peer Carillion. Jobs are being slashed, the housebuilding unit is being sold and the company is prioritising cash flow.
“These all seem like sensible steps but delivering on this plan will not be easy. The turnaround programme delivered by Leo Quinn at rival group Balfour Beatty offers Kier something of a template.”
Babcock/Serco
“Having done a decent job of repairing its own wounds, outsourcer Serco is looking to hunt down wounded animal Babcock. The latter has chosen in turn to bare its teeth and fight back with a strong rebuttal.
“Babcock’s weak financial performance of late and the subsequent pressure on the share price left it vulnerable to takeover interest and there had been speculation over a bid before this news was made public.
“The proposed all-share combination would have created a defence services powerhouse, albeit one which would be heavily reliant on Ministry of Defence spending.
“Arguably Serco is punching above its weight. Its margins are slimmer than Babcock’s, it has a materially lower market value and it still faces its own challenges, not least an ongoing fraud probe relating to overcharging the Ministry of Justice for tagging offenders.
“If there is any disappointment among Serco shareholders that its overtures to Babcock have been rebuffed it may also be tinged with relief, particularly as it is less than a month since the company announced the proposed £170m acquisition of US defence firm Naval Systems Business Unit.
“Chief executive Rupert Soames has saved Serco from the brink of bankruptcy when he took over in 2014 and has probably earned a bit of trust from the market but that doesn’t mean the company should run before it can walk.”
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