Scrutineer: Homing in on real blame

Published on Thursday 21 August 2008 21:41

WHILE it was hardly the hand wringing or contrition which marked the recent bank reporting season, there are signs that the housing sector is also swallowing its pride and accepting that some of its own problems are of its own making.

It has become clear that some of the smaller British banks, most notably Northern Rock, but also Bradford & Bingley and even Alliance & Leicester, were so geared for growth, so dependent on giving out more and more mortgages, that they simply could not stop without taking a hit, or in Northern Rock's case, without effectively collapsing.

Housebuilders have behaved in a way that is not entirely dissimilar in terms of land acquisition, taking on hundreds of millions of pounds of debt to extend land banks, on the forecasts of growth this year and more in the future.

During the good times, this was a mug's game, with land-bank valuations being revised upwards in line with average sales prices even as the prices being paid to landowners continued to rise.

But now that the market has turned, the cost of debt has increased, sales have fallen, and with debt covenants based on the relationship between market capitalisation and the book value of assets, some companies faced disaster when they wrote down the value of their enormous holdings.

Yesterday, Persimmon, which is by no means the worst positioned in this regard, conceded it was likely to learn from the aggression with which it had built up a stock of around 80,000 plots.

Already this has declined by about 7 per cent in the last year, and the company indicated that, at least for the next few years, it would take a much more cautious approach to buying land.

Clearly, Persimmon is giving a full and frank view of the state of the sector, which it no doubt privately hopes has hit the bottom.

But whereas the sector could simply blame the banks for the state it is now in, those involved seem to be increasingly accepting that they too were caught up in the hype of what we now know was a very fragile bubble.

There is little more certain than that, when the market turns, home owners will begin once again to say "as safe as houses" without the obvious irony the term currently holds.

But at least we can hope that the boards of the builders, and the institutions which drove them to seek such growth, will remember how quickly and dramatically it went wrong last time.

TWO sectors you might not choose to be in in these difficult times might be print media and aviation, writes Erikka Askeland.

Because, no matter how much we love newspapers, the internet is having a significant effect on papers sold. When it comes to planes, the price of fuel is threatening the way we have become accustomed to flying abroad on a whim and a 100 credit card limit.

This is probably why John Menzies' share price has taken a nosedive since May. Although the company is probably better remembered by Scots as a newsagents, it is now among the top four worldwide in cargo handling and delivers millions of papers and magazines each day.

That is why the analysts's views are mixed. On the one hand, UBS says "sell" as they figure Menzies is tainted by the cost of aviation fuel. Not so fast says Arbuthnot, whose analysts figure mixing up Menzies' fortune with those of the airlines they serve is misguided.

As the group's finance director, Paul Dollman, rightly points out, the aviation business may suffer the slowdown but they don't hold the jerry can. And although the cost of petrol affects the distribution business, a whopping 75 per cent of these costs are being passed on to the media companies they work for.

It is clearly not clear blue skies for Menzies. Their US business is loss making. Not only did they have to bear the cost of their warehouse in Chicago getting mown down to make way for a new road, no-one is flying (or shipping by air). They have, however, dispatched the UK head of cargo, John Redmand, to "attack" the cargo business in the US.

The thrust in the engines is India, where Menzies picked up three of four new contracts in two new airports in Hyderabad and Bangalore. These brand-new airports opened like a lotus flower – like T5 but without the grief. India needs more airports and Menzies is ready.

Shareholders will benefit, with the firm upping its interim dividend 5 per cent to 7.56p.