Builders and banks set to report results this week

Feb 25 2008

The state of the property and mortgage markets will be tested this week when a number of housebuilders and banks report results for 2007.

A gloomy note from Dresdner Kleinwort set the scene last week for results in the housebuilding sector, with the broker expecting the reporting season to reveal the “grim reality” facing the sector.

Housebuilders have been adopting a “wait-and-see” approach to the key spring selling season, but the upcoming round of results will end this cautious optimism, according to Dresdner analysts. “The housebuilding recession began on September 15, the day after Northern Rock imploded,” said the broker’s hard-hitting note.

Shares in housebuilders plunged on the sombre outlook, with Taylor Wimpey down 8% in one day and Charles Church owner Persimmon also hit, off 5% on the note’s release. FTSE 250 Index firms did not escape the negative sentiment and Barratt Developments dropped 4%.

Persimmon reports this week, as do second tier housebuilders Barratt and Redrow. Persimmon’s full-year figures on Tuesday are expected to reveal pre-tax profits of between £575 million and £600 million in 2007, from £582.1 million in 2006. But it is the group’s outlook which is set to attract attention, with mounting fears it will show that the market has turned.

The group, however, is one of the strongest players in the sector and therefore could withstand a downturn better than its rivals, according to Dresdner.

Barratt follows with interims on Wednesday, with analysts pencilling in pre-tax profits of between £190 million to £200 million. The previous year’s interims were £180.2 million, but this time round the figures will include Barratt’s £2.2 billion purchase of rival Wilson Bowden.

Fellow FTSE 250 firm Redrow reports half-year figures the day after as the reporting season gets fully under way. Dresdner predicts that bid activity will soar as the sector’s woes become fully apparent and picks Redrow as the prime candidate for takeover attention once the market bottoms out.

Royal Bank of Scotland and Halifax Bank of Scotland are the next of the “big five” banks to report full-year figures in a closely watched round of results from the sector. First up is HBOS on Wednesday, which will see the spotlight shone once again on impairment provisions in the wake of the credit crunch and with default rates under scrutiny.

The group, which owns mortgage giant Halifax, has seen shares come under pressure amid concerns over write-downs and arrears, with bad news earlier this month from lender Bradford & Bingley sparking further losses.

HBOS said in December that bad debt charges were lower in the second half of the year after an 11% jump at the interim stage, to £963 million. But according to Dresdner Kleinwort, the group could see some of the sector’s highest bad debt provisions, forecasting £2.24 billion for 2007 - not far below the £2.8 billion posted earlier this week by its larger rival Barclays.

Analysts are expecting underlying pre-tax profits of £5.76 billion, up marginally on 2006’s £5.54 billion. HBOS has already revealed a £180 million blow from the credit crunch, but the market will be watching for news of further losses or exposure.

NatWest parent company RBS follows on Thursday with what will be its first set of annual results since snapping up Dutch bank ABN Amro.

Stripping out ABN, expectations are for the bank to post underlying profits before tax of £10.3 billion, up from £9.4 billion the previous year.

It sparked relief among investors at the end of last year when it confirmed lower than feared write-downs for both RBS and ABN of £1.5 billion, of which £250 million could be offset elsewhere.

As one of the more exposed to the credit crunch and US sub-prime mortgage meltdown, RBS has been a concern in terms of write-downs and its results will be eyed closely for further potential losses.

Investec Securities cast a cloud over the bookmaking sector last week after cutting its price target for William Hill and Ladbrokes because of concerns about prospects over the remainder of 2008 and 2009.

The broker noted difficulties with William Hill’s online expansion, whilst Ladbrokes has been under pressure in UK retail, a sector that Investec thinks could be more exposed to a slowdown than has historically been the case.

The two companies will have the chance to respond this week, with William Hill due to report full-year figures on Wednesday and Ladbrokes on Thursday.

William Hill has already said in an update that operating profits will be around £285 million for the year to January 1, lower than some City forecasts.

But it spooked investors by ditching a major upgrade of its internet betting operation. The group spent three years developing technology which would have allowed punters to place multiple bets during a variety of sports fixtures.

After a management review in November, bosses decided to write off the work done and bring in experts to install separate technology.

Ladbrokes has revealed its own difficulties, with a below-par performance in UK retail only offset by bumper profits from high-spending telephone punters.

The chain said the poor summer weather and race cancellations impacted its high street performance, as trading profits in the four months to October 31 would have been 12% lower without the high-rollers.

Investec said it was unclear how the sector will perform in a slowdown, given the changing mix of the core customer group towards a younger, slightly more affluent male and the increasing importance of machine gaming.

The broker is targeting pre-tax profits of £315.3 million from Ladbrokes, compared with the £246.5 million reported a year earlier.

International transport group National Express looks set to please the market on Thursday following a strong all round 2007.

The bus, coach and train operator recently promised results would be at the top end of market expectations following good trading in the second half of the year.

Its upbeat sentiment was underpinned after winning the East Coast Main Line franchise from rival GNER. The contract will see the firm pay the Department for Transport £1.4 billion during the franchise, which runs until March 2015.

As well as the flagship train route and its familiar inter-city coach network, National Express also runs UK train services including the Gatwick Express and London commuter services One and c2c. It also operates bus and train routes in Spain and North America.

In December, National Express said “exceptional performance” in the UK had seen like-for-like revenue growth of 11% on trains, 6% on buses and 6% on coaches.

UBS said the group’s UK and Spanish rail arms were likely to be the pick of the bunch. There was no sign of a downturn in National Express’s businesses, UBS said, and it revised the contribution to underlying profits from its UK rail arm up 19% to £63 million.

Consensus figures for 2007 show group underlying earnings coming at £203 million, compared with £185 million for 2006.

Go-Ahead shares took a hit this month following cautious guidance and JP Morgan warned of a downside for the National Express outlook in the form of further economic troubles affecting revenue growth on the East Coast line.

Mecca Bingo owner Rank Group will report 2007 figures on Friday after a testing year for the firm.

The smoking ban introduced in England last July hit the group hard, as did laws introduced to limit the number of high-value jackpot machines.

Shares in the group have fallen off dramatically, plummeting from 160p to below £1 since October. Rank said in December that like-for-like revenues had declined by 18% in the 14 weeks from September 1 and warned it faced an “uncertain” 2008 amid weaker consumer confidence.

The firm’s share weakness has attracted interest from the likes of Malaysian gaming group Genting, which fuelled takeover talk late last year and has built up an 11% stake. Buy-out firm Duke Street Capital is also rumoured to be looking at making an approach for the troubled Mecca arm.

Analysts are expecting 2007 operating profits to have fallen by nearly 17% to £64.3 million and adjusted pre-tax profits to have dropped to £41.5 million from £44.4 million in 2006.

But Evolution analysts suggested there may be better times ahead for the group. A recent visit to Rank’s 102-strong estate Mecca showed marked improvements, with smoking shelters and food offerings now on site, according to the group.

Rat catcher-to-washroom hygiene group Rentokil Initial unveils its full year figures on Tuesday.

The business services firm warned the City in December that profits were likely to be £10 million short after weaker consumer spending impacted its City Link delivery arm.

Rentokil said the usual pre-Christmas surge in volumes in City Link’s business-to-customer sector had been later and less than expected.

The announcement caused shares in the company to slump 13%, even though it said trading at its other divisions remained in line with expectations.

Elsewhere in Rentokil’s portfolio, a plague of rats unleashed by the UK’s summer floods and downpours in July saw Rentokil’s pest control arm experience its busiest month of business for a decade.

Evolution Securities said 2007 had been a year of two halves, with profits 16% lower in the six months to June 30, and forecast to grow 32% in the second half despite the City Link warning.

Rentokil, which rejoined the FTSE 100 Index in August after relegation to the second tier a year ago, said first half results had been impacted by “seasonal” losses at its US pest control business JC Ehrlich, acquired in 2006. Interims were also impacted by a turnaround plan launched at the start of 2007 which included a host of business disposals and acquisitions.

Evolution analyst Andrew Darke said: “The parcels division should still deliver a 40% increase in annual profits and...other divisions are recovering in line with plan. The basic message should be a significant second half recovery despite the City Link shortfall.”

Consensus forecasts for adjusted profits before tax and amortisation are £216 million, compared to £209.1 million in 2006.

Rentokil employs around 70,000 people in more than 40 countries.