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BT scraps dividend until March 2021, IAG sitting on €10bn cash
Another one bites the dust – BT Group has become the latest casualty in the massacre of FTSE dividends. Management have taken the axe to this year’s final dividend and all next year’s pay outs.
I’ve been arguing they ought to have done this sooner in order to free up capital for infrastructure investment and right the wobbling balance sheet. Net debt stands at nearly £18bn, ballooning from £11bn a year ago, though management say this is largely down to the implementation of IFRS 16.
Another headache for BT has been confirmed – the O2 and Virgin Media deal is going ahead. Whether or not you agree that companies ought to be prioritising investment or survival over shareholder returns, the income investor is not going to find life easy for the next 18 months. Investors ran for the hills – already-pressured shares opened 11% lower.
IAG – €535m operating loss before exceptional items in the first quarter but by far the worst is to come with demand collapsing. It booked an exceptional charge in the quarter of €1.325bn on derecognition of fuel and foreign exchange hedges for 2020. This swung reported losses to €1.683bn.
IAG at least seems to be able to ride out the storm: management are touting €10bn of cash and undrawn liquidity facilities going into the headroom.
Against this they have reduced weekly cash operating costs to €200m from €440m and reduced capex this year by €1.2bn. It won’t need to take delivery of new aircraft if it’s not flying. IAG expects to be running at best at 50% from July but won’t be back to 2019 levels of demand until 2023 at the earliest.
Morning Note: Trade war escalates, Uber IPO caution, IAG profits sag
Tariffs on $200bn worth of Chinese exports were raised to 25% last night. Trump was true to his word, and there is no can kicking. This marks a sharp escalation in the trade spat, but it’s not gone nuclear yet.
Talks between the Chinese and the Americans are continuing today, although we don’t hold out much hope of anything meaningful being achieved this week.
It all tends to suggest Mr Trump is playing one of his aces in order to force the Chinese into concessions. His bet is that the US economy can weather any hit from tariffs better than China. He is probably right but this will not help ease uncertainty about the global economy. Beijing is weighing whether to retaliate.
Yesterday the S&P 500 bounced off its lows, closing down just 0.3% at 2870.72, having plumbed lows around 2835. The Dow was offside by 139 points on the close, but was over 400 points lower at one point. Algos seemed to bidding it up after the ‘beautiful letter’ nonsense.
Oil has rallied, indicating markets have had enough of the selloff. Brent was last pushing up at 70.75, above the key 70.60 resistance point. The flag pattern does look like it could be a bullish continuation pattern that is just about complete – watch for a leg higher. But failure to cement the tentative gains we see this morning would be bearish – look for the area around 69.50 for support.
Asian stocks bounced overnight and European futures point higher today. Chinese stocks were last about 3% higher – just remember how much these stocks had sold off earlier in the week. There is still hope that a deal will be done.
Uber prices at low end
Uber priced at the bottom end of the range at $45. It’s a rough time to be coming to the market after the selloff this week but this IPO exists to a degree in its own bubble. Are you betting on the long payoff? If not, you may well be disappointed – profits are not coming any time soon.
But shares could yet pop higher today, partly because of this conservative approach that Uber clearly learned from Lyft’s bumpy ride post-IPO. I said yesterday (Uber set for big pop despite Lyft worries, 09/05/19) that I would not be surprised if the people selling Lyft stock are simply doing so in preparation for the Uber listing, so be careful reading too much into the Lyft troubles. FOMO is a strong emotion.
Nevertheless, my main concern is the slowing revenue growth. Whatever the cash burn, you’d want to see accelerating top line growth in a disruptor coming to market.
IAG profits sag
Profits at IAG were hit by rising fuel costs and a big FX headwind, whilst we see a broader thread across airlines with margins being competed away. Excess capacity remains a problem, as we heard from Lufthansa. In fact, we can pretty much regurgitate what we noted about Lufthansa – lots of competition means no one has the pricing power, whilst labour costs are a factor, but the biggest headwind right now is fuel costs, which were up 15.8%. Non-fuel costs were 0.8% higher.
Although passenger revenue growth was at a healthy clip, up in excess of 5%, first quarter operating profit slumped to €135 million before exceptional items, which was down 60% from a year before on pro forma basis. Profits after exceptional items – which were zero in Q1 – were down 86%. FX headwinds knocked €61m from the bottom line. 2019 operating profit is seen in line with 2018 – which means no growth in the year ahead.