Lombard

Last updated: July 31, 2014 9:34 pm

Investor, by their writedowns so shall you know them

‘Exceptionals’ in Lloyds, Shell, and Diageo results

You can tell a lot about a company by its exceptionals. The extent to which businesses recognise these recurrent one-offs in headline profits was displayed amid a slew of results Thursday. As to comparability, forget it. You aren’t even comparing apples and pears. Sandwich toasters and dinosaurs is more like it.

Lloyds was least willing to absorb a punch. Might the bank helmed by António Horta-Osório be just a tad sensitive to criticism? It set aside another £600m to compensate customers who were mis-sold insurance and paid £226m in fines for rate fiddling. Half-year pre-tax profits dropped 60 per cent to £863m partly as a result.

Yet enthusiasts were able to hail “a profits beat” because underlying earnings as defined by Lloyds rose 32 per cent to £3.8bn, exceeding consensus.

Diageo followed a middling course with its prelims. Operating profits were not deemed to be “underlying” either before or after exceptionals, which included a write-off on the value of a Chinese spirits group. Sterling strength meant these fell 10 and 20 per cent respectively. Optimists focused on organic growth – expressed in constant currencies – of 3 per cent. And prayed.

Consistent with Dutch sang froid and oil industry norms, Shell bore the most pain. It produced an unequivocal second quarter “earnings beat” with headline profits more than doubling to $5.4bn. The number included a $2bn writedown on North American assets and the deduction of tax.

Back when Methuselah was a boy, City analysts aspired to measure corporate performance not by profits but cash flow (“reality”, apparently). Did the push fail because no one could agree a benchmark, or because it did not suit vain chief executives? I think we know the answer to that one. Today, only investors skilled in measuring Brevilles against Brontosauri have got a clue what is going on.

Affrighted by Afren

The whiff of scandal is never far away from natural resources companies operating in the developing world. Oil group Afren has suspended chief executive Osman Shahenshah because he may have benefited from unauthorised payments. Investors wonder whether skeletons will now clatter from the closet of this darling. The market value shrank from £1.6bn to £1.2bn on Thursday.

In contrast to other exploration and production companies, there is little danger of Afren running out of money. Underlying earnings from production in Nigeria and Kurdistan exceed net debt.

Afren’s corporate governance history is patchier than its financial back story. Last June investors rejected pay policies that included a big bonus for Mr Shahenshah. They were rattled by Afren’s disclosure that executives had invested in a company in which Afren later took a bigger stake.

This may have sensitised the board. This year it commissioned a law firm to determine whether some company dealings should have been disclosed. The lawyers found evidence that Mr Shahenshah and chief operating officer Shahid Ullah could have benefited from payments related to the unidentified transactions.

The publication of postponed results and lawyers’ findings will bring greater clarity. Meanwhile, investors should ponder how often the success of racier E&P companies is achieved by means that may be questionable.

Balfour, mon amour

Our agony aunt service resumes:
Dear Lombard, about a week ago I got engaged to a guy called Roger. Neither of us is young, dynamic or popular. So we seemed well suited.

Shortly after, I found Roger riffling through my bank statements. Then he said he’d only marry me if I hung on to my flat, which I’m selling. Said he needed security. We had a row. Now the whole thing is off.
I feel used and miserable. Help! – Steph
Dear Steph, I can understand that you now see Roger as a heel. Balfour Beatty feels the same about Carillion, another construction company. The pair were planning a merger – it looked defensive, because shares in both have lagged behind the market over three and five years.

BB has just stormed out of talks because Carillion – which had promised to pay a premium in shares – wanted to keep Parsons Brinckerhoff. This is a subsidiary BB hopes to sell for more than $600m, which had never been part of the merger.

Carillion now says Parsons’ earnings would give the pairing stability. It has had a look at BB’s books meanwhile, in the way Roger went through yours. Perhaps both saw liabilities they disliked? Perhaps Carillion’s shareholders were lukewarm.

Speaking of busybodies, do you think Roger’s Mum wanted you to keep your flat? She might have been planning to move in with you. Lucky escape I’d say. Though not for BB. It needs a rescuer.

jonathan.guthrie@ft.com

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