Slower consumer demand hits Rexam but outlook stays bright

As a Frenchman with a Belgian name, the cultural leanings of Leslie Van de Walle must lie with the euro. But if the chief executive of Rexam has a favourite currency right now, it is likely to be sterling. The sharp slide in the pound over the past few months has enabled yesterday’s trading update from the FTSE 100 packaging group to read better than it might otherwise have been. Including the “positive effect of currency translation”, Rexam said, results for the four months to October 31 “were in line with expectations and the outlook for 2008 remains unchanged”. In other words, were it not for the slide in sterling – the company draws half of its sales from America – things could have been a lot worse. That much is evident from Rexam’s decidedly downbeat account of underlying trading. Sales volumes of beverage cans in the United States – where Rexam has recently closed 9 per cent of its production capacity – continue to fall, with recent price rises from the likes of Coca-Cola and PepsiCo adding to the pressure on consumer demand. Economic turbulence in Russia, hitherto one of its fastest-growing territories, is denting can sales. Growth in continental Europe has slowed to about 6 per cent, from 8 per cent to 10 per cent previously, with another summer of poor weather taking its toll. And in Rexam’s plastics division, customers are trading down to cheaper pumps and dispensers – such as those used for perfumes and cosmetics – at the expense of the company’s margins. That means that the bright spots are in South America, where Rexam continues to run at full capacity, and in speciality cans (mostly smaller sizes than the standard soft drinks can), where volumes are rising across all regions. Nor will Rexam gain much benefit from lower aluminium and oil prices. Pass-through contracts with customers that protected the company from rampant commodity inflation mean that the gain from subsequent deflation is negligible. However, cheaper fuel will help Rexam’s hefty diesel costs for road freight movements. Yesterday’s update was inevitably vague on next year’s trading, and, in itself, is unlikely to draw new buyers. But at 321?p, up 4?p, Rexam – a constituent of the Tempus Ten – is still forecast to grow profits ahead of its peers, trades at eight times 2009 earnings and yields a solid 6.4 per cent. Hold on. Burberry Burberry’s Latin motto Prorsum, which adorns its equestrian knight logo and top-of-the-range fashion brand, means forwards, but its underlying sales are going backwards. Yesterday’s first-half figures from the luxury goods group revealed that like-for-like retail revenues, having been up 3 per cent in the six months to September 30, are showing a “mid-single-digit” fall. That much was in keeping with what rivals such as Bulgari, Hermès and Richemont have said in recent weeks. What was more worrying was the hit to gross margins that Burberry has sustained – 3.4 percentage points – from clearing unsold stock at a discount: particularly in America, where the drop-off in demand has been most severe. The upshot is that next year’s profits will be roughly 13 per cent lower than expected. Accordingly, the shares fell 13 per cent to a six-year low. Not all was gloom. With the exception of Spain, sales continue to grow in Europe and Asia and Burberry has scope to protect its bottom line through an additional ?15 million to ?20 million of cost savings. For example, it will move goods by sea rather than air, saving up to 90 per cent on its freight bill. Burberry is also a beneficiary of a weakened sterling: it draws a quarter of its sales from America but less than 10 per cent in Britain. At 175p, the shares sit at six times current-year earnings and yield 6.9 per cent, which is cheap both relative to its peers and for a company with a strong balance sheet and massive potential for emerging-market growth. It will soon be right to buy, but, given the volatility of Burberry’s trading patterns before the key Christmas period, bargain-hunters should await January’s third-quarter update before making a purchase. Big Yellow Shareholders have become inured to the excuses that companies give for cutting their dividend, so Big Yellow Group should be commended for finding a new one. In cancelling its payout for the first time in four years, the self-storage specialist said that it preferred to use the cash to open new stores. Its shares rose 6 per cent. Not entirely without reason. Big Yellow has never been bought as an income stock (even at Monday’s three-year low, the prospective full-year yield was only 4.4 per cent), so any disappointment was modest. Rather, the company’s attraction has been its potential to boost profits through expansion, making its decision to forego dividends to develop ten new sites much of a piece. In short, Big Yellow’s pledge to investors is to turn undeveloped land – which is dilutive of earnings – into income-producing assets. There was also relief that the company’s first-half update was more upbeat than that from Safestore, its rival, last week. Occupancy levels across its portfolio predictably worsened between March and September (from 79 per cent to 76 per cent), but over the past seven weeks the preChristmas lull has not been as pronounced as last year. Further, bad debts remain stable. This suggests that, amid a sharp fall in housing transactions (to which its sales are inevitably linked), Big Yellow is faring relatively well. However, with net debt at ?296 million and trading likely to worsen, the shares, even at 230p, or a 48 per cent discount to net asset value, are best avoided. ---business.timesonline.co.uk