Centrica spends about £1.5 billion a year out of its cash flow on investment in the business, about £1 billion of that in the UK and Norwegian sectors of the North Sea. The fact that the company has nothing better to do with any surplus cash than to hand it back to investors, £920 million in all in 2013 and 2014, tells you all you need to know about the attractions at present of investing in the UK onshore power industry.
The first £500 million share buyback was announced in February, as the company decided not to invest in the UK nuclear power industry, and is now largely complete. The second will come next year from the £420 million proceeds of the sale of three gas-fired power stations in Texas.
Centrica has decided that buying its own shares provides a better return, then, than investing in areas outside the North Sea and keeping its core business maintained. It is hard to disagree with that view, given the pressure on earnings after Ed Miliband’s promise of a price freeze at the Labour Party conference, which knocked almost a fifth off the share price since then. One hopes its near-700,000 retail shareholders are aware of all this.
The Texas deal is a clever one. Centrica operates only in unregulated states. The assets are bringing in a return of barely 2 to 3 per cent a year, but the prices of such stations are still high. The company supplies customers there and has the option to take the plants’ output from the new owner, Blackstone, for three years, if it cannot source this cheaper elsewhere.
Last week Centrica was revealed to be in contention to take a power station in Co Cork and 800,000 customers in the Irish Republic as part of a consortium bidding for assets being sold by Dublin.
Other deals this year have involved the purchase of assets in Canada and to take liquefied natural gas exported from Louisiana. The November profit warning suggested low growth prospects across the group and said margins at British Gas Residential in the UK this year would be below the 5 per cent in 2012 even before any political interference. There is little incentive or opportunity to invest there.
The main attraction of the shares, up 5½p to 328¾p, is the dividend yield. There is no prospect of that dividend being cut, indeed analysts are still expecting a decent increase.
The yield for this year is now above 5 per cent, then. The whole sector will remain undermined by political considerations. But that yield is reason enough to hold.
Given that it is the season of goodwill, we might say that it’s the thought that counts. The two main investors in Ferrexpo, the Ukrainian iron ore producer, have until March to increase the free float in the shares in London to at least 25 per cent. They have done so, by the bare minimum needed.
Kostyantin Zhevago, the chief executive, has 51 per cent, the private equity company BXR Group almost 26 per cent. Mr Zhevago will sell 0.7 per cent shortly, BXR at least 1 per cent thereafter. As a consequence, he retains a stake of more than 50 per cent and so control.
He is entitled to do this. BXR’s sale keeps him above 50 per cent. Investors should have no real complaints; they knew what they were buying, and Ferrexpo will have more than a quarter of its shares trading freely on the London market.
Had this not happened, the shares would have come out of the various indices, tracker funds would have had to sell, and the price would have fallen. One can see why the two big investors were not keen to sell more. The shares were trading above 500p in May 2011; they were off 1½p at 182½p last night. The main influence is the cost of iron ore, which fell in 2012, hit a low of about $110 a tonne in May and is up by 22 per cent since.
Most forecasters think it will weaken into next year. Only yesterday Sam Walsh, chief executive of Rio Tinto, the second biggest producer, suggested this.
Ferrexpo has the advantage of owning the rail links from its mines to the Black Sea port of Odessa. The most recent trading statement, for the third quarter, saw production rising as its Yeristovo mine ramps up. The price it is getting is still lagging that rise on the world market because of fixed-price contracts.
A decision still has to be made on whether to build additional plant at Yeristovo to cope with additional production, and the trading statement was non-committal. The main drag on the shares is the continuing unrest in the Ukraine.
I suspect in the long term the outcome of this will not make much difference, because whatever administration emerges still needs iron ore exports. The uncertainty will continue to weigh on the share price, though. Like those two main shareholders, I would not be a seller.
Simon Duffy, chairman of bwin.party digital entertainment, who announced yesterday he was stepping down next year, said his three-year tenure had included “numerous challenges”.
They include the merger between bwin and PartyGaming in 2010, the decision to exit various territories where online betting is unregulated or unprofitable, and a couple of spells this summer when the results from football, its most important sport, ran against the bookies.
The shares, approaching 160p in June, slumped to 110p two months later. They added 9¾p to 125½p on a pre-close trading statement that suggested bwin.party was back on an even keel and poised for further growth.
Gross win margins in sports — the proportion of wins to losses — have recovered, though volumes are down because of a lower number of football matches in November.
The company has just started operating in New Jersey, where it is already market leader, and there are product launches coming along in the new year. The shares sell on 13 times next year’s earnings, which does not suggest much upside.
I wrote yesterday about the prospects of Inmarsat seeing some payback from the LightSquared broadband network in the US, which wants to use part of its spectrum. Those prospects worsened overnight. Centerbridge, the private equity firm that was a potential bidder in the auction for the network, has withdrawn, leaving the $2.2 billion from Dish the only offer on the table.
Gilts
UK government bonds gave ground after unemployment fell more than expected to its lowest since 2009, sparking concerns that the Bank of England could lift interest rates sooner than previously thought. March gilt futures settled 41 ticks lower at 107.42. In the cash market, the yield on ten-year gilts rose four basis points to 2.91 per cent.
Bet of the day
Spread-betters were teeing up orders to sell the pound, even as it jumped again against the dollar. Sterling’s latest push higher was prompted by a sharper than expected fall in unemployment. However, braver punters looked at the currency’s recent run and thought about calling the top. Capital Spreads quoted $1.6378-$1.6379 to the pound.
Deal of the day
Canny traders were keeping a close eye on Ferrex, off 5.1 per cent at 1.88p. The word was that the AIM-quoted iron ore and manganese developer would today reveal that Anglo American and South Africa’s Kumba Iron Ore, two huge miners, will fund the exploration of its Mebaga iron ore deposit in Gabon for two years.
