8 months ago

BusinessDay 10 Apr 2018


Tuesday 10 April 2018 COMPANIES & MARKETS @ FINANCIAL TIMES LIMITED Deutsche Bank: revenge of the nerds Decades of experience as risk manager will help Christian Sewing ANDREW WARD Internal auditors are meant to be the eyes and ears of management. They are not meant to become the management. Christian Sewing has nevertheless replaced John Cryan as chief executive of Deutsche Bank. The erstwhile head of group audit — latterly co-head of retail banking — looks an uninspired choice forced on Deutsche because external candidates shied away. This is a problem for chairman Paul Achleitner, as culpable for recent underperformance as Mr Cryan. For Mr Sewing, there is hefty upside. War stories about that time he uncovered an undocumented cache of ring binders in Düsseldorf may not impress other bank bosses, typically ex-investment bankers. Such tales will appeal more to investors, judging from a 3 per cent pop in the shares on Monday. They know investment bankers are the problem, not the solution, at Deutsche. Last year, the investment bank generated only two-fifths of continuing profits before tax and central costs. The division, primarily fixed-interest securities trading, meanwhile accounted for threequarters of risk-weighted assets of Here’s what’s happening London-listed Russian stocks including Evraz and Polymetal fell in response to the US government’s announcement of sanctions against some Russian companies. Global depositary receipts of EN+, Oleg Deripaska’s aluminium and hydropower conglomerate, plunged to a record low after the US announced that its own citizens cannot do business with the company and its Hong Kong-listed subsidiary Rusal and have 30 days to wind up any positions. “The impact on [EN+’s] power segment will likely be minimal given its sales are almost entirely within Russia. However, Rusal may find it more difficult to do business given that it is the second-largest supplier of aluminium to the US after Canada,” said BMO Capital Markets. “Furthermore, given the attempt to limit even non-US citizens from facilitating transactions it is possible that activities as simple as exchanging currencies may become more expensive for Rusal given the international scope of its operations and sales being priced in US dollars.” Rolls-Royce led the FTSE 100 gainers after agreeing to sell its L’Orange, a fuel injector business, to Woodward Group for €700m. Analysts said the price, at about 11 times L’Orange’s 2017 ebita, seemed reasonable though not that significant in the context of Rolls’ £16bn market valuation. €324bn. The unit’s weak cost-to-income ratio of 92 per cent is in line with the retail division. But the latter has a better chance of fattening margins. Rates will rise sooner or later. Lossleading competition from US rivals will, in contrast, remain a constant in investment banking. Mr Sewing has a clear trajectory, even if Mr Achleitner does not. He needs to slim down securities trading. This will help him lift leverage from about 3.8 per cent today to a targeted 4.5 per cent. The German loans business should benefit from savings from the Postbank merger and a focus on corporate clients. There will be noise. Doomsters will say cutting any part of investment banking hard will reduce the viability of the whole. They will say the German loans market is structurally dysfunctional. Such existential doubts can be dispelled by meeting targets and raising returns on tangible equity, in negative territory for the past three years. Mr Sewing should be helped by his decades as a risk manager in the London investment bank among other outposts. If he succeeds, top bankers will suddenly become receptive to anecdotes about internal auditing. Like that time he lost his biro in Stuttgart? Classic Christian! Helluva guy! Stocks to watch: Evraz, EN+, Rolls-Royce, Xaar, Wirecard Seek shelter at the end of the commodity rally, says SocGen BRYCE ELDER “To us, this looks like a sensible price for a non-core asset — more important is that it signals a continuing simplification of the group that should allow the company to be more nimble and focus capital allocation in its core areas,” said Citigroup. Sellside Stories Peel Hunt upgrades Oxford Instruments to “buy” and cuts Xaar to “hold” as part of an overall bullish review of the UK industrials companies. With economic indicators in the US and Asia remaining firm, and the UK engineers operating in niche areas with high market shares, the threat of a trade war “has taken valuation for many of our stocks into very interesting territory”, Peel Hunt said. It also expected the recent acceleration of merger and acquisitions in the sector to continue, with the UK operators seen both as targets and consolidators as industrial companies spin off divisions outside their core competencies. Peel Hunt’s eight core sector buys are Avon Rubber, Coats, Rotork, RPC, Synthomer, Tyman, Vesuvius and Vitec. It also raises IMI and Renishaw to “add” and “hold” respectively, on valuation grounds. Société Générale upgrades BHP Billiton to “buy” with a £16 target price in a mining sector review, which argued that investors should be “seeking shelter” at the end of a two-year commodity price rally. SocGen’s top pick is Glencore and it downgrades Anglo American to “hold” on valuation grounds. FINANCIAL TIMES ADAM SAMSON Russia’s equities benchmark tumbled almost 9 per cent on Monday amid renewed worries over US sanctions against its business sector and after Donald Trump criticised the country’s support for the Syrian government. The Moex index plummeted 8.7 per cent in mid-morning action in Moscow, leaving it on track for its heaviest dive in four years. In a sign of the breadth of the fall, only two of 46 constituents traded in positive territory on the day. The US dollardenominated RTS gauge dropped 11.4 per cent. The fall in the equities bourse came amid a broad drop in Russian financial markets. The rouble dropped 2.5 per cent to 59.63 to the US dollar, according to FactSet data. It has not recorded such a weak C002D5556 closing level since late-November 2017. Investors have reacted very bearishly to the Trump administration’s sanctions against seven Russian business people and the 12 companies they own or control. “Russian oligarchs and elites who profit from this corrupt system will no longer be insulated from the consequences of their government’s destabilising activities,” the Treasury department warned on Friday. President Trump also called out Russian President Vladimir Putin at the weekend over his support for the Syrian government. The Syrian American Medical Society, a medical relief organisation, reported that 48 people were killed and many more were injured in a chemical weapons attack in eastern Ghouta on Saturday evening. BUSINESS DAY A3 Cuadrilla drilled to a depth of 2,700m and then extended laterally for 800m through a gas-rich area beneath its site off Preston New Road, near Blackpool © Bloomberg Russian stocks tumble 9% on US sanctions worries Rouble drops 2.5% to 59.63 to the US dollar Mr Trump said on Twitter that there would be a “big price” to pay for the alleged attack. “Essentially, geopolitical risk has increased with the rouble the main casualty so far as Russia was strongly criticised for supporting Syrian President Assad,” said Piotr Matys at Rabobank. Rusal, an aluminium producer targeted by the sanctions, was the worst performer on the Moex index on Monday, off by about a quarter. Oleg Deripaska, the group’s owner, was also slapped with sanctions. In London trade, Mr Deripaska’s EN+ Group dropped 27.5 per cent. Evraz, a London-listed steel and mining business that derives 40 per cent of its sales from Russia, was the worst performer on the FTSE allshare index. Shares dropped 15.6 per cent in recent trade. Turkish companies kick off IPOs while lira hits new lows Pace of listings picks up while global and domestic pressures leave mark on markets CAT RUTTER POOLEY A trio of Turkish retailers announced plans to list on Monday in a sign that the anticipated ‘record year’ for initial public offerings may be hitting its stride despite intense strain in other parts of the country’s financial markets. On the same day that the lira struck a record low of TRY5 against the euro, grocery group Sok Marketler, value fashion brand DeFacto and luxury clothing and shoe retailer Beymen all kicked off the process of listing on Turkey’s Borsa Istanbul, after a slower than expected start to the year for Turkish companies coming to market. Turkish companies had been expected to tap equity investors for up to $4bn in 2018, according to forecasts from Bloomberg, which said that level of fundraising would represent a record high. The IPOs aim to capitalise on the rapid growth of Turkey’s consumer sector, which has boosted retailers. Turkey’s economy grew at a clip of 7.3 per cent in the final quarter of last year - a slowdown from the rate of 11.1 per cent year-on-year in the previous quarter - as the government has poured money in the domestic economy to shore up support in the wake of 2016’s coup attempt. Sok, a supermarket and discount grocery store group, said it had opened around 3 stores a day since 2015 - around 1,000 a year - and now has a total of more than 5,100 outlets employing some 24,000 people. Sok was now an “unrivalled operator in the fast-growing and underpenetrated Turkish grocery sector,” chief executive Ugur Demirel said on Monday. “In each of the last three years we have been the leading Turkish retailer in terms of revenue growth, new store growth and market share growth,” he added. But the revival of companies seeking to raise share capital from public investors comes in the middle of a challenging period for Turkish markets. The lira sank to its weakest level in the history of the modern currency last week, which has put pressure on companies with euro and dollar-denominated debt but generate a significant proportion of their revenues in the domestic currency. The weakness persists on Monday, with traders doubtful that the central bank can get sticky inflation under control. Global tensions over trade are also taking a large toll. Sok is seeking to raise $650m in new money from its IPO - in addition to a possible sale of shares by its existing investors - in the largest fundraising of the year to date. Of that, it says it intends “to use a substantial majority of the net proceeds of the Offering to repay substantially all of its current financial indebtedness, including its bank borrowings and related party non-trade payables”, with the remainder used for general corporate purposes. Beyman, which is selling more than 62m existing shares in its listing, says its selling shareholder is committed to using the funds to repay intercompany loans, which will then been used to pay down the debt under its syndicated loan facility.

A4 BUSINESS DAY Tuesday 10 April 2018 STRATEGYBRIEFING IDEAS THAT POWER HIGH PERFORMANCE The Strategy and Execution Gap Closing the gap that breeds corporate mediocrity Statistics available from indicates that advertising spending in Nigeria in 2017 amounted to US$618.06 million and is expected to increase in 2018. That’s a lot of money. This spending only represents a part of what companies spend on their sales effort. Borrowing from the words of Mark Twain, ‘put all your eggs in one basket, then watch that basket’. Meaning if you are going to spend that much money on sales, then you better take your sales very seriously. Unfortunately business executives don’t seem to do this. Research indicates that sales is, by far, the most expensive part of strategy execution in many companies. Yet, on average, companies deliver only 50% to 60% of the financial performance that their strategies and sales forecasts have promised. And more than half of senior executives (56%) say that their biggest challenge is ensuring that their daily decisions about strategy and resource allocation are in alignment with their companies’ strategies. That’s a lot of wasted money and effort. This limits growth, impedes superior performance and therefore a case of serious concern. What this mean is that the decisions, behaviours, allocation of time and other resources at many companies cannot enable them follow in the strategic direction they have determined. So even though a company may have committed resources to the development of a strategy, it cannot translate into a superior performance. The reason for this is not difficult to find. Strategy is still generally misunderstood by many executives. Of those that understand, misconceptions about strategy shuts them out of strategic effectiveness. For example an assessment by GrowthPlay, a sales focused consulting firm among senior executives and sales professionals indicates the problem stems from gaps between the perceptions, attitudes, and information flows between executives and sales reps. The results from the assessment shows that executives have a high level of understanding of their companies’ strategic priorities, while sales professionals usually not involved in the crafting of their company strategy did not demonstrate the same understanding. Senior leaders have a better relative understanding of the company’s direction than sale reps, but are concerned that they lack the right sales processes and people to executive the strategy. On their own, sales processionals are confident in their abilities to produce results but admit they have little understanding of the strategic direction, and its implications for their behavior. When sales professionals lack the understanding of their companies strategic direction, they more efficient at their routines, even when these same routines keep the firm, and its top team, from gaining experience with procedures more relevant to changing market conditions. Why does this happen? Why are the front line sales professionals and senior executives in such disalignment even at the expense of superior performance? Well to begin with many companies don’t even have a strategy even though think they do. They have mission statements, they have shared values, they have particular intentions they want to pursue like internationalizing but for them any of these might be the strategy. Unfortunately none of that constitutes a strategy. If there is no strategy how can senior executives communicate something that does not exist? Strategy is a company’s unique approach to competition and the competitive advantages on which it will be based. Its not a particular action, its holistic and cuts across all the functions. Another issues and its a pretty one is that most senior executives are scared that communicating their strategy will expose them to strategy theft. But come to think about it, such executives should understand that they stand a more serious problem than strategy theft. You see strategy is useless without execution. Preserving your strategy so that your competitors don’t know about it and at the same time shutting your people out means it will not be executed and that means you will at best play along others as a corporate mediocre. How often have you read about the strategy of Google, Apple, Bulberry and Nike? For example it took US car manufacturers many years to get good atToyota’s lean manufacturing methods,even though Toyota willingly gave factory tours to it’s rival executives.More recently,traditional companies continue to struggle to adopt the digitally powered methods of online leaders like and Google,although the outlines of these methods are well known. What does it show? Communicating your strategy doesn’t compromise your position if you really have a strategy (read my article on ‘Nigerian companies rarely have a. strategy’) In a world with a global infrastructure of consulting firms and others paid to disseminate corporate information, confidentiality as a reason for not communicating strategy is myopic and a pathway to failure. Your people cannot execute what they don’t understand. This gap is the reason most companies only struggle along. Brian Reuben(@brianoreuben) is an advisor on strategy and leadership. He regularly conducts keynote presentations and senior executive workshops with companies around the world on strategy and leadership. He heads BusinessDay Training Was this article helpful? Share your thoughts with us on Facebook @bdtraininglive or email us on This Page Is Open For Sponsorship, for details call 07039092902.

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