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Podcast transcript
Susannah Streeter: Hello and welcome to Switch Your Money On from Hargreaves Lansdown. I’m Susannah Streeter – Head of Money and Markets.
Sarah Coles: And I’m Sarah Coles – Head of Personal Finance.
Susannah Streeter: We’ve spent a fair amount of time over recent weeks talking about the UK Government’s stake in NatWest. It recently stopped being a majority shareholder after its holding fell below 30% as a result of its daily trading plan – and plans to be fully private by 2026. As part of this grand plan, it will make shares available to retail investors as early as June.
Sarah Coles: That’s partly because speculation is swirling about the date of the UK election – which is forecast to take place in the autumn – and it seems increasingly likely that the Government will want the NatWest share sale to take place before we head to the polls.
Sarah Coles: This would be the highest-profile public share offer since the Royal Mail IPO more than a decade ago. Giving retail investors a slice of ownership in NatWest is certainly a welcome move, given that they’ve been left out of previous sales, which have been reserved for institutional investors.
This is a recurrent theme. Retail investors are rarely offered the full suite of investing opportunities, so this would buck the trend.
Sarah Coles: For many of us, all this talk about the NatWest share sale has brought back memories of the wave of privatisations we saw in the years between 1979 and 1997 – and the famous ‘Tell Sid’ advert which encouraged people to buy British Gas shares.
Susannah Streeter: So, we thought that this would be a really interesting time to explore those companies that were previously owned by the Government in an episode we’re calling ‘What to tell Sid now.’
Sarah Coles: We’ll explore how some of those privatised companies are faring with Sophie Lund-Yates – our Lead Equity Analyst. We’ll also talk to Guy Miller – CEO of Altnet MS3 – a full fibre network operator in the North-East of England, which is an industry building up to take on a giant which was part of the waves of privatisation. In this case, the Openreach part of BT which runs the fibre.
So, Guy – how does it feel to be up against an incumbent of this kind of size?
Guy Miller: The incumbency creates huge challenges for us as a business, but it also creates huge opportunities. Typically, some of these businesses are large – they’re stale – and they don’t always have the best consumer intentions at heart. Smaller companies can be more agile – they can really understand what consumers need – and they can better-evolve following tech trends. We, fundamentally, as a business can shift our strategies – can offer new products – within months – where incumbents typically take years to turn things around – and this is why we’re seeing a wholesale shift in the Broadband landscape in the UK at the moment.
Susannah Streeter: Thanks very much, Guy – we look forward to finding out more in the podcast. We’ll also be speaking to Emma Wall – our Head of Investment Analysis and Research – for a Fund Manager perspective.
But, first of all, back to ‘Sid.’
Sarah Coles: Yes – it was a memorable advert, but it was just part of a broad wave of privatisations between the end of the 1970s and when Margaret Thatcher was replaced as Prime Minister. More than 40 state-owned businesses had been privatised in that time – and that included early sales like British Aerospace and Cable and Wireless in 1981, which were done with very little fanfare.
Susannah Streeter: Enthusiasm then built within Government, so it became a campaign issue in the 1983 election, which ushered in a wave of privatisations, including BT, BP, British Airways, BAA, Powergen, National Power, and Severn Trent Water.
This created millions of new shareholders – and shareholding went from being something for just 7% of the population in 1979 to 20% 10 years later.
An awful lot has happened to these companies since privatisation – and a number of them have changed beyond recognition. Anyone who bought and held onto British Gas shares, for example, would now be holding shares in National Grid, Centrica, and Shell – after numerous corporate changes. Likewise, those with a stake in BAA will have received a lump sum for them in 2006 when they were sold.
Sarah Coles: But, while a lot has happened to the shares, less has happened to the trends in share ownership – so this didn’t start a dramatic shift to shareholding that continued. The number of Brits investing directly in the stock market has remained around a quarter – and households hold less than 4% of their assets in shares. This compares poorly, internationally, where the French, Danes, Germans, and Spanish hold a larger proportion of their assets in shares. It’s dramatically less than the US, where 36% of household financial assets are in stocks – while shares are held by 61% of Americans.
Susannah Streeter: This was one of the themes of the Spring Budget – centred around a push to encourage pension funds to invest in the UK, a new British Savings Bond, the consultation into a British ISA – and, of course, the sale of a tranche of NatWest shares – all of which the Government is hoping will play a part in encouraging UK investors to ‘Buy British.’
Sarah Coles: Some investors are already very involved. Those who started with privatisations may have used it to kick-start an interest in investment, which encouraged them to go on to invest in a broader, more diversified portfolio.
Susannah Streeter: However, there is always the risk that, for others, a handful of single company shares dominate their portfolio, or leave it significantly unbalanced. Nobody would recommend you select your investments based purely on those that were privatised in the 1980s, and yet that is exactly how some people have done it.
Sarah Coles: It means, if you hold shares, it’s vital to consider where they fit in your overall approach to investing – and whether they’re suitable for your needs.
If they do fit within your portfolio, there’s also the question of whether these are the right stocks to hold – so it’s important to regularly review them and seek advice if you’re at all unsure.
While the answer to this question’s going to be personal to each individual, it’s important to understand the companies you’re investing In – the companies’ specific risks – and also to make sure any business that you own is held as part of a diversified portfolio. Ultimately, if a company fails, you risk losing your whole investment.
Susannah Streeter: Let’s delve a bit deeper into some of the companies we’ve mentioned – and we’ve asked Sophie Lund-Yates to look into the fortunes of some previously privatised firms.
So, Sophie – with privatisation in mind – who have you been looking at this week?
Sophie Lund-Yates: This week, I’ve been having a look at Centrica – which is the listed company that owns British Gas.
So, ‘Where does Centrica stand now?’ – I suppose is what I should really get to.
Centrica has definitely been through some tough times in recent years – including an 8% drop in customer numbers in the British Gas Services Division last year because of cost-of-living pressures. What I would say is that service levels are improving following hefty investment – so that’s something positive, but also needs monitoring. The group also has an energy trading business – which actually benefits from energy-price volatility – and prospects here are looking healthy. In fact, profits from this area are expected to be £250m-£350m by 2026. That follows a period of serious ups and downs in profitability in recent years, thanks to the upheavals seen in 2022.
Centrica also recently reinstated the dividend and bulked out the share buyback – and these seem well supported by a balance sheet which is in good health. No shareholder return is ever guaranteed.
Ultimately, progress has been really impressive, but profit is expected to moderate in the near future – and, of course, any further spikes in volatility could reshape the group’s trajectory.
Sarah Coles: Thanks, Sophie – and another space that’s been through privatisation is, of course, telecoms. So, what can you tell us?
Sophie Lund-Yates: Absolutely – we are, of course, referring to BT. Now, there are a few things that telecoms have in common – and one of them is very high barriers to entry. The amount of money and time it takes to set up a bona fide telecoms network really doesn’t bear thinking about – so that helps protect market share somewhat. Everyone needs phone signal – and Internet too – so there’s a certain reliability of demand, but of course there are no guarantees.
BT’s big strategic focus these days is on simplifying product lines and operations – including shifting customers onto 5G and fibre optic. One area that sets BT apart is Openreach, which is the machine behind building and maintaining those fibre networks. As you can imagine, the knowledge and kit needed to make this happen is pretty unique – making it an asset.
This does all come at a cost though – and that means margins and profit growth aren’t the most attractive. That’s not to say there aren’t some great qualities under BT’s umbrella, but rather growth isn’t something we’re massively excited about at the moment.
Susannah Streeter: And who is the final name this week?
Sophie Lund-Yates: That would be International Distribution Services – which is the newer name for Royal Mail.
There are some real challenges facing the group. Letter volumes have been falling for some time – and this hasn’t been met by an equal reduction in costs. Efforts to slim down the workforce have been repeatedly met with industrial action and resistance – and, with that said, there are some green shoots. There’s a strategy in place to turn Royal Mail around – and there has been a significant reduction in headcount.
The group also have an international business – GLS. This is propping up profits these days – as inflation subsides, we should see more movement on margins too.
There are a lot of hurdles for the group to clear – not least finding someone to fill the CEO position. As I said, there are some potentially brighter spots, but lots to monitor for now.
Susannah Streeter: Thanks very much, Sophie – it certainly seems there is plenty keeping these companies busy at the moment.
Of course, it’s not just about the privatised companies, themselves – they also have a broader impact on the industries they operate in, including the Broadband space. So, Guy – he’s still with us – let’s bring back in.
Guy – thanks very much for joining us. Can you tell us a little bit more about Altnet MS3 Networks?
Guy Miller: MS3 Networks has actually been around longer than people think – around 12 years – and it was created as a challenger brand in the city of Hull. It is the one part of the country where BT don’t have full presence. Due to a interesting quirk of history – 120 years ago – all the national telecom companies came together to form the GPO – which, ultimately, became BT and Openreach – a network provider – and Hull stayed fiercely independent and ran as a business called ‘The Hull Corporation’ – originally council-owned and then privatised – and what became KCOM today. But we operate against an incumbent of 120 years in Hull – and we also operate in markets where BT have been the dominant provider for that time.
Our DNA is in around challenge – it is in around seeing what incumbents do – and realising that it can be better.
Sarah Coles: You talk about ‘The challenge.’ Presumably – with the power that BT and Openreach has in these kind of markets – that you are starting from a position of challenge. How does that affect your business?
Guy Miller: We’ve all grown up with an expectation of connectivity – in an expectation of telecoms – which is set by BT. Telecoms companies have always, historically – the larger ones – had customer satisfaction scores as some of the lowest across all industries – and this new wave of providers – what we call ‘Altnets’ – ‘Alternative Network Providers’ – are really turning that on its head. They’re looking at companies like Apple, and Tesla – and their Net Promoter Scores – and saying, ‘Why can’t it be done in Broadband?’ Actually, what we’re doing – amongst a number of others that are around the country – is saying, ‘Let’s put the customer first.’ ‘’Let’s not think just about the technology about our own business processes – weeks to turn things around – call quality that drops off – mobile signal that dies – Broadband connections that are ropey – and can’t do your Teams calls at home.’ We’re actually saying, ‘How can this be different?’ If you can listen to the customer – if you understand what households and business in Britain really want – you can change things quickly. And these larger providers just don’t have the opportunity – don’t have the time – don’t have the will to change.
But there are huge challenges as well. Typically, in regulated markets – such as telecoms – regulators support incumbents – maybe deliberately – maybe accidentally – and we have to work really hard to make sure that regulation and awareness supports this new market growth as much as the ambition of the individual companies does.
Susannah Streeter: Has the landscape changed recently?
Guy Miller: So, these Altnets that have popped up in the last decade – and certainly more so in the last three years, we’ve seen rapid growth – are now covering around 13 million premises around the UK. There’s about 30/32 million homes – so we’re about a third covered – and most Altnets do realise that, actually, we’re all here to compete against the incumbents. The last thing we need to do is compete with each other. So, whilst we can’t collaborate – in terms of where people are building networks – and where we want to drive competition – no-one’s business case is supported by overbuilding another Challenger brand.
So, what we’re really trying to do is build Challenger Networks in every corner of the country – whether that’s urban networks to compete – and whether that’s rural networks to compete.
Sarah Coles: If companies are all looking, presumably, at those most densely populated areas – because it makes biggest bang for your buck in terms of investment – d’you think that those Challenger brands are going to be mainly focused there, or d’you think that there can be expansion to slightly less densely populated and rural areas?
Guy Miller: It’s a good question. There are different business cases that work across the country.
So, urban builders clearly have a cost advantage – but what you typically find is that, on top of BT, you also have Virgin Media presence as well. So, you can build in an urban area – you tend to start off third. However, in rural areas, Virgin Media, typically, isn’t deployed there – and you’re competing as ‘Number Two’ – and, hopefully, gonna try and take that ‘Number One’ slot over time.
So, what you see is – whilst it may be more expensive to deploy networks in rural areas, you instantly start with a better competitive advantage. Importantly, when it comes to our copper Broadband service – the fibre to the cabinet service – and ADSL services – that we’ve had for 20 years – they are frequently very, very poor in rural areas. There are still a disturbing amount of homes that are getting sub-five MEG connections – who really struggle to do what most of us do every day without thinking – who can’t do Teams calls at home without turning off the video.
There is a genuine opportunity everywhere – because of the incumbents’ history, cost base, and attitude to customers.
Sarah Coles: If you’re looking ahead, d’you think that these big, privatised companies are always gonna have that power of size, or d’you think things are gonna change in the future – so that they will gradually dwindle over time? D’you think there’s a role for them in the picture, or d’you think that’s gonna go?
Guy Miller: I have real belief that we are on the cusp of fundamental change in Broadband.
So, whilst someone like BT – who's always going to be big – if you look at BT share price over the last five years, it is down. If you look at Vodafone share price over the last five years, it is down. These are fundamental reset positions by investors who know that that large monopoly position – where you’re able to price-rise mid-contract every year – where you’re able to offer phone lines that take two hours to get through to customer service: this is dead.
So, I believe there is a fundamental reset happening here – where we will end up – in most locations around the country – with a choice of three networks. The important thing is the networks are typically sold by others. Openreach’s network is sold by BT – it’s sold by Sky – it’s sold by TalkTalk.
Actually, what we’re talking about here is the change of the network, themselves, to a better quality network - networks that can offer speeds of 10,000 MEG as standard – networks that don’t go down. The end customer will still have the choice of which ISP to buy from, but they will start to be using these new networks underneath – and that’s a real challenge for these big incumbents.
Susannah Streeter: Thanks very much, Guy – it’s really interesting to hear what’s going on in a growing area of the UK economy.
In fact, the UK is an interesting region, more generally, at the moment because it’s relatively unloved.
So, this is a good time to bring in Emma Wall – our Head of Investment Research and Analysis. She’s
been chatting to Adrian Gosden of Jupiter Asset Management.
Emma Wall: Hi, Adrian – we’re here today to talk about the UK equity market – which I think it’s fair to say has been somewhat unloved. I saw a stat the other day that suggested it was at a 40% discount to other developed markets. Why have the UK equities been so unloved for so long?
Adrian Gosden: It’s been a long time since the UK equity market has caught people’s imagination as something they want to invest in. ‘There’s been some much bigger stories elsewhere’ – I think I’d describe it like that. However, I’m not a big fan on comparing the UK market to other international markets – so they’re quite different.
The most common one people compare the UK market is to something like the US market – but the US market – about 40% of the S&P is made up of the technology shares – and, in the UK market, the technology component of something in the FTSE 100s is just one share.
I think those comparisons can be a bit misleading, but the one thing that is very clear to me is the UK market is, historically, very cheap against itself. What I mean by that is, if you were to look at the average P/E on the UK market in the FTSE 100 – or indeed in some of the mid and small – it’s actually near a 30-year low. So, in my whole investing career, the UK market has never been cheaper against itself – and that is BP against BP – it’s Barclays against Barclays – it’s GSK against GSK. So, on that basis, that is of real interest to me for my investors to promote the UK as a possibility of potential returns – given the fact the starting point is the lowest they will have seen in their investing history.
Emma Wall: And this lack of expense – or, rather, creation of value – is causing some quite unusual corporate behaviour. I’m talking here about buybacks – UK has been renowned for great dividends for some time – a real income market – but, now, we’re seeing quite extraordinary buyback commitments from business as well – aren’t we?
Adrian Gosden: Yeah – I think we’re seeing two very interesting developments in the UK market – because of this ‘Cheapness’ – as I’d describe it.
The first is corporate activity – there’s absolutely loads of it going on – literally, you can’t go a week in the London market without a UK-listed company being bid for by an overseas company, private equity, or another UK-listed company – and we’ve seen that every single week into 2024. But it’s actually the companies, themselves – I think their behaviour’s the most interesting one.
As you rightly describe, they are paying very good dividends. The dividend on the UK market is very strong – it’s well-covered by cashflow – but the cash they have left over – having paid that dividend – they’re now doing share buybacks. Share buybacks have been a minor sport in the UK market over time – and maybe you’d have seen £10-£20bn of share buybacks in any one year. Now, you’re seeing over £50bn – so that’s more than two-and-a-half times the normal amount of share buybacks are going on – on a annual basis – in the FTSE 100. This is from the likes of the banks – like Barclays and Lloyds – but also in the Oil sector – but it actually goes right across the sectors. It’s not to do with what they’re actually doing – it’s they all see their shares as undervalued – and they’re doing these share buybacks. Because, in their mind, it’s the best use of capital – because their shares are so undervalued.
And another feature that is quite interesting – and maybe people should focus on – is they’re telling you how much they’re gonna buy back – not just in one year, but across the two-to-three-year period.
For example, BP said they would buy back $14bn of their own stock across the next two years – and Barclays said that they would buy back £10bn in addition to dividends – and that was over a three- year period. That’s about 40% of their market capitalisation.
So, not only are they doing share buybacks – which is really interesting – but they’re also telling you what they’re gonna be buying back over the next two to three years – which is quite extraordinary.
Emma Wall: So, from a total return point of view, you’re being rewarded with dividends – you’re being rewarded with buybacks – but, ultimately, investors also want to see share prices rally [laughs]! That is the ultimate for the majority of investors – that they want growth.
This the multi, multi-billion pound question! – what is the catalyst for change going to be? Because, in terms of share-price valuation, the UK’s been in the doldrums – unloved for some time – so there’s got to, therefore, be something that changes this around.
Adrian Gosden: Focusing on growth is important – it’s gonna be a government focus – focusing on productivity. This is all a narrative that investors will be very familiar with – and ‘Why?’ Let’s face it – investors have been pulled to other markets: US technology – or emerging markets like India. India GDP is about 8% - ours is 1%. You can totally understand why people are drawn to those areas – but share prices reflect what’s in front of them – and what the future years look like. For the UK market, the interesting thing is – when the companies are buying back that amount of their own equity, it removes the amount of shares in issue. So, if you were to take a company – even something like Imperial Brands – which is a tobacco company – so you don’t expect much growth from a company like that.
Because it buys back its shares at the same time of its actual business is doing – the EPS – the Earnings Per Share Growth of Imperial Brands is about 10%. That makes it the fastest growing consumer staple listed in London.
Emma Wall: Adrian – thank you very much.
Susannah Streeter: That was Emma Wall talking to Adrian Gosden of Jupiter Asset Management – and please bear in mind that shareholder returns are never guaranteed and that these are the views of the Fund Manager and are not individual stock recommendations.
You’re listening to Switch Your Money On from Hargreaves Lansdown – and, before we go, there’s time for a quick stat of the week.
I thought I’d focus on British Airways – now part of IAG. It was fully privatised in 1987, and a million people wanted to get their hands on the shares. It was so popular that the share price spiked on the first day of trading – but by how much?
I realise that this is tricky, so I’ll let you have a 10-percentage points either way.
Sarah Coles: I’ve got no idea. I wasn’t old enough to be trading shares in 1987! – but, given the popularity, it’s gonna be something massive – so I’m gonna say 50%.
Susannah Streeter: Not even close, I’m afraid. In fact, it was over 80%. Of course, the stock has had more of a difficult time in recent years – and the IAG valuation hasn’t fully recovered from the shock of the early pandemic.
Sarah Coles: As someone who recently booked flights, I can confirm that this isn’t because they’re giving away the tickets cheap – at least they’re not doing that during the school holidays.
Susannah Streeter: No – it is scorchingly high at the moment for those airline seats. The endless parent tax strikes again!
Well, that’s all from us for this time. Before we go, we do need to remind you that this was recorded on 2nd April 2024 – and all information was correct at the time of recording.
Sarah Coles: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. Investments rise and fall in value, so you could get back less than you invest – and past performance is not a guide to the future.
Susannah Streeter: This is not advice or a recommendation to buy, sell, or hold any investment. No view is given on the present or future value, or price of any investment, and investors should form their own view on any proposed investment.
Sarah Coles: And this hasn’t been prepared in accordance with legal requirements designed to promote the independent of investment research and is considered a marketing communication.
Susannah Streeter: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research. However, HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.
Sarah Coles: You can see our full non-independent research disclosure on our website for more information.
So, all that’s left is for us to thank our guests: Guy, Adrian, Sophie, Emma, and our Producer, Elizabeth Hotson.
Susannah Streeter: Thank you all very much – and thank you for listening. We’ll be back again soon – goodbye!