FTSE preview: Sainsburys and Centrica results due

Jun 15 2008

Inflation figures and trading updates from Sainsbury and Centrica should keep spiralling food and energy prices in the spotlight this week.

Bank of England governor Mervyn King may have to publish a letter to the Chancellor once the inflation figure for May is known on Tuesday.

Further rises in fuel and food prices mean the Consumer Prices Index (CPI) is expected to rise above the 3% mark during May, the first time this has happened since March 2007.

It will trigger an open letter to Alistair Darling from Mr King, who has to explain why inflation has risen more than 1% above the 2% target, and what the Bank is doing to bring the measure down.

Inflation has been on a steady climb since last August and jumped 0.5 percentage points last month to 3% - the biggest monthly rise for nearly six years. Surging gas and electricity bills, food prices and Budget tax hikes on alcohol and tobacco were blamed for the leap.

Industry input prices have remained high in May, pushed up by a continued rise in the price of oil which reached a new high of 139 US dollars a barrel earlier this month - 40% up this year alone.

Official data earlier this month gave the Bank of England a fresh inflation headache after revealing factory gate prices surged at their fastest rate for more than 20 years during May.

Soaring petrol, scrap metal and food costs caused a 1.6% rise in prices month on month - the biggest increase since March 1981, according to the Office for National Statistics (ONS).

Philip Shaw, UK economist at Investec Securities, is forecasting CPI to reach 3.1% in May.

“The cost of petrol rose by around 4%, food prices were probably strong once again, while utility tariffs fell in May last year, providing an adverse base effect this time,” he said. “Our forecast is that the CPI measure ticked up to 3.1%.”

Halifax Bank of Scotland will outline in detail this week why it wants shareholders to stump up £4 billion.

The high street banking giant is to issue a prospectus about the looming cash call, as well as a trading update, although the release date has not been specified.

HBOS launched the rights issue in April amid widespread speculation over its financial position. The group, which has suffered multi-billion writedowns on investments linked to the credit crunch, said the funds were needed to “consolidate its competitive position”.

But it means more than two million of HBOS’s smaller shareholders face paying out to maintain their stake in the bank.

Last week turmoil in the markets sent HBOS shares below the discounted rights issue offer price of 275p - raising questions about investor appetite for the new stock.

It led to an unscheduled statement from the bank saying that the issue, which is fully underwritten, was “proceeding according to plan”. It also said current trading - and specifically mortgage arrears performance - was in line with expectations.

The words of reassurance helped shares recover back above the rights issue price.

Investors will be eager to hear more about the trends in mortgage arrears for HBOS, which is Britain’s biggest mortgage lender with more than £362 billion outstanding.

In HBOS’s last update at the end of April, the bank said it expected a “modest” increase in overall impairment losses.

Northern Rock, which was a major competitor before being nationalised earlier this year, saw its level of mortgages three months and over in arrears rise to 0.95% at the end of April, from 0.57% at the end of last year.

While non-food retailers have suffered in the consumer spending slowdown, supermarkets have so far avoided any sudden sales decline, as Sainsbury is set to confirm on Wednesday.

Even though sales have been slowing in the grocery sector, supermarkets have still been able to notch up fairly healthy performances this year on the back of discounting and rising food prices. Tesco recently posted like-for-like sales up 3.5%, excluding petrol, in its first quarter figures, and Sainsbury is predicted to offer a similarly solid update.

Britain’s third biggest supermarket has been upgraded by a raft of analysts in recent days ahead of the results. Its shares have come under pressure, not least on the back of Tesco’s cautious comments over future trading. But the stock market declines are thought to mask an otherwise healthy first quarter performance from Sainsbury, with Deutsche Bank analysts pencilling in comparable growth of 3.5%, down from 4.1% in the previous quarter.

Meanwhile, JP Morgan said on its recent upgrade of the group: “Whilst Sainsbury’s trading has not stood out, it has been solid and considerably better than that of Tesco on an underlying basis.”

Restaurant and hotel giant Whitbread sounded a note of optimism over future trading when it unveiled full year figures in April. As a result the market will be looking for continued bullish comments when it updates at the same time as its annual general meeting on Tuesday.

The firm reported pre-tax profits of £210.3 million from continuing operations for the year to February 28, up 26.3% on a year earlier and better than expected by analysts.

The owner of the Beefeater pub-restaurant and Costa Coffee chains also pleased investors with news that said trading since the year end had been “encouraging”, while it said it was confident of growing the business through a consumer downturn.

While many groups are battening down the hatches with fears of a recession looming, Whitbread is striding ahead with its expansion plans in India.

It announced in April that it has secured the first four of its planned 80 sites for new hotels in India and said it also has a pipeline of a further 11 sites in India for its Premier Inn chain.

The expansion is part of plans for 12,000 rooms in the next 10 years in a joint venture with Emaar-MGF.

Premier, which held talks over a potential £3 billion merger with rival Travelodge earlier this year, accounts for almost half of Whitbread’s revenues.

The group has focused efforts on growing Premier Inn and its Costa coffee chain, which seems to have paid off.

The Premier Inn budget hotel chain enjoyed a record past year, and there are now plans to grow the business by 50% to 55,000 rooms in the next five years.

Meanwhile, Costa, which has 695 outlets in the UK, opened its 1,000th store in Moscow earlier this year and is set to total 2,000 stores in five years’ time.

Morgan Stanley analysts said they expect a “relatively robust” first quarter from the group, but forecast full-year pre-tax profits of £224 million, around 4% to 5% below consensus, as they believe Whitbread will not be completely immune from a recession, even though it has yet to show any signs of a slowdown.

Clearer signs of widely-predicted further gas and electricity bill rises could come from British Gas owner Centrica when it issues a trading update on Thursday.

The company issued a veiled warning about hikes last month when it pledged to take the “necessary action” to protect margins from soaring wholesale gas costs.

Centrica said overall operating profits for the first half of this year would be “materially lower” compared with a year ago, mainly due to the pressure on the British Gas (BG) business.

Upward pressure on wholesale energy has continued since the announcement thanks to spiralling oil prices and increased demand from continental Europe. The price of wholesale gas for delivery this winter also passed the £1 a therm mark for the first time last week.

The price is now more than double its level a year ago, at a time of year which historically saw lower prices due to reduced gas demand.

Analysts at Cazenove have forecast that British Gas Residential, which supplies gas and electricity to 16 million customers, will have to hike bills by 30% during the next six months if there is no let up in the wholesale cost.

“The near term outlook for Centrica is difficult, with a considerable retail price rise likely in the second half of 2008. The trading statement....is likely to confirm that the commodity environment remains challenging.,” the broker said.

Credit Suisse echoed the sentiment, saying bill increases were likely this summer “in order to preserve profitability in the Residential Energy business.”

The bank also warned that based on wholesale price data “further significant increases are likely required in early 2009”.

“We believe Centrica management will make the necessary increases,” it added.

British Gas upped its gas and electricity bills by an average of 15% in January. The UK’s other five major domestic energy suppliers also imposed double digit rises.

Wine warehouse chain Majestic Wine came under pressure over the pre-Christmas period amid stiff competition from its supermarket rivals and analysts are expecting the trading conditions to have remained just as challenging since the festive season.

The group reported like-for-like sales in the nine weeks to the end of 2007 at just 1.2% ahead and experts suggest recent trading will have been been impacted by the increase in alcohol duty as well as the supermarket competition. But the slower run-up to Christmas is not thought to have dented pre-tax profits growth for the full-year to the end of March, expected to be revealed on Monday at £16.7 million, up 3%.

The results will mark the last set of full year figures for chief executive Tim How, who is set to retire in August after almost two decades at the helm. He is widely credited as having been the driving force behind the group, having helped turn Majestic around from a small loss-making chain into a business with more than 140 outlets.

The business model he has created has been praised by analysts at Dresdner Kleinwort, with its skill in carefully thought out expansion.

And Altium Securities believes that under incoming chief executive Steve Lewis, currently chief operating officer, it has scope to expand even further, although there are fears that the business may suffer in the increasingly tough retail environment. Discounting is becoming all important in luring in hard-up shoppers and supermarkets are hard to compete with in this area.

However, the expansion possibilities both online and in terms of stores gives Majestic greater scope than others to see off the grocery rivals.

As Altium said: “Majestic is still a rollout story - it has scope to add at least 100 UK stores. It also has the financial strength to see it through the retail slowdown so that it can capitalise on that potential. Indeed, new space is likely to become more readily available at more attractive prices.”