FTSE preview: The week ahead

Apr 28 2008

First-quarter results from oil giants BP and Royal Dutch Shell will drive interest this week, alongside updates from hotel and leisure group Whitbread and Argos owner Home Retail Group.

Royal Dutch Shell and BP will go head to head with first quarter figures on Tuesday after contrasting fortunes in 2007.

The clash - due to Royal Dutch Shell moving its usual reporting day to avoid a public holiday in Holland - promises an extremely busy day for City watchers looking to assess the performance of both companies.

Both companies’ upstream business will be helped by record oil prices of more than 100 dollars a barrel, but investors in BP will be hoping for shoots of recovery following the group’s difficult year in 2007.

They may also look for evidence of chief executive Tony Hayward’s pledge to “close the performance gap” with rivals after annual profits fell by more than a fifth.

Mr Hayward set out his stall in February with a 25% dividend hike to cheer his beleaguered shareholders and plans to cull 5,000 of its 97,000 employees.

A consensus of analysts predict “clean” first quarter profits of 5.27 billion US dollars (£2.67bn) - 32% ahead of last year.

However, there are a wide range of forecasts, reflecting the differing assessments of the group’s refining performance, which has been plagued with difficulties in the US at a time of elevated prices.

Royal Dutch Shell meanwhile prompted calls for a windfall tax after 2007’s record surplus of 27.6 billion US dollars (£13.9bn) and is expected to have kept up the profits momentum into the new year.

Clean profits are set to be 22% ahead at 6.77 billion US dollars (£3.43bn) for the first quarter.

But it has not been all plain sailing for the group this year after militants stepped up attacks on its operations in the Niger delta. The group also cut 180 jobs in Aberdeen last week as part of an efficiency overhaul.

Charles Stanley analyst Tony Shepard said: “With BP, it is about recovery but it could be too early to see any financial recovery in its refining business, which should be weighted towards the second half.

“With Shell the upstream operation could see a decline in volumes due to Nigeria, the question is how much.”

Premier Inn owner Whitbread recently dashed hopes of a £3 billion merger with Travelodge after it ended talks last month. But full year results from the chain tomorrow are not expected to disappoint investors.

Premier has become Whitbread’s star performer, with like-for-like sales at the hotel chain increasing at almost double the rate of the rest of the business.

The business is currently the largest hotel group in London by number of properties, with 44 hotels and 5,300 rooms. A deal with Travelodge would have cemented its pole position, but Whitbread announced soon after an aggressive expansion plan in a sign that it means to grow whether or not by acquisition.

It said earlier this month that it was to increase the number of rooms in London to 6,500 with a further pipeline of 2,000 rooms expected over the next 12 months as it seeks to position itself ahead of the 2012 Olympics.

The Premier chain powered sales in its latest trading update, with comparative sales growth of 10.5% over the 50 weeks to February 14, compared to 0.9% at its Beefeater and Brewers Fayre restaurants.

The group’s Costa Coffee operation delivered a like-for-likes sales increase of 5.7% in what was a robust update from Whitbread, suggesting that the full year figures unveiled on Monday will follow suit.

Analysts are expecting underlying pre-tax profits of £204.9 million from Whitbread, although comparisons with the previous year are meaningless given a raft of sales, including the £925 million disposal of David Lloyd Leisure in August last year.

Argos and Homebase owner Home Retail Group will give the latest picture from the beleaguered retail sector with annual profits on Wednesday.

In the year to the end of February the group is expected to post a 14% rise in pre-tax profits to £430 million, according to consensus forecasts.

Argos maintained like-for-like sales growth throughout last year - a modest 0.7% - although this compares favourably with the 4.1% decline seen at DIY business Homebase.

But official retail figures last week showed falling sales volumes in March, as the sector struggles with tough comparisons with last year and the poor weather over the earliest Easter weekend for nearly a century.

Shore Capital analyst John Stevenson is expecting Home Retail Group’s like-for-like sales to fall by 3.5% in the first three months of the new trading year, with Homebase as much as 7% lower.

He said: “We expect first-quarter trading to be nothing better than dreadful for the majority of general retailers with seasonal product exposure.”

The group has seen its share price fall by more than a third in the past six months in a darkening retail climate, although this may offer hopes of a potential bid.

“We believe that Home Retail’s valuation is likely to be of potential interest to a number of global industry players viewing the prospects for consolidation,” Mr Stevenson added.

The UK’s biggest video games retailer, Game Group, has been a rare shaft of sunlight amid the clouds over the retail sector following a succession of positive trading updates.

In March the Basingstoke-based group guided the market to pre-tax profits of no less than £74 million for the year to January - ahead of previous hopes - in results for the year to January, due on Tuesday.

The figures will be boosted by last May’s £74 million acquisition of rival Gamestation, which was cleared by competition authorities in January.

Trading has also been lifted by the presence of five successful hardware formats such as the Wii and Sony PlayStation 3, and a strong pipeline of software - keeping up management confidence in the buoyant state of the market.

In January, the group warned of “limited” like-for-like sales growth this year as tough comparisons with March’s PS3 launch took effect. Two senior directors also sold significant holdings in February, causing nerves among some investors.

But Game upgraded its sales estimates to growth of between 5% and 10% in March to help soothe market concerns.

These fears have not been quelled among all City watchers, however, as rivals look to muscle in on the market.

Altium Securities’ David O’Brien said: “Following a difficult Christmas for most retailers last year, with video games one of the few trading highlights, we would expect other generalist retailers to devote greater shelf space to this area this year.”

Halifax Bank of Scotland is the next of the UK’s “big five” banks to face shareholder questions, with the group’s annual general meeting scheduled for Tuesday.

The event takes place against a backdrop of increasing anxiety over write-downs and liquidity, following Royal Bank of Scotland’s £12 billion cash-call to investors announced last week. As attention now turns to which bank will be next to appeal to investors for a capital injection, HBOS is finding itself once more at the centre of speculation over a potential rights issue.

The group, owner of mortgage giant Halifax, only recently had to issue strong denials as false rumours swept the City that it was facing a funding crisis. City watchdogs were forced to step in, as was the Bank of England as the talk failed to die down, at one stage dragging HBOS shares down 17%.

Despite its denials at the time, experts have tipped the group as one of the favourites to follow RBS’s lead and shares have once more come under pressure. The group will no doubt be quizzed over its capital funding and the likelihood of it turning to shareholder support.

Any update on current trading amid the credit crunch will also be keenly watched, with the market particularly sensitive to any more bad news from the already under-fire banking sector. HBOS posted lower than expected annual profits earlier this year and had already warned of continued uncertainty in financial markets. As the crisis in credit markets and the mortgage sector has only deepened since then, it has had a tough past few months to contend with.

Broadcasting group BSkyB will post third quarter figures on Wednesday in what is likely to provide a welcome shift in focus for the group away from the saga over its controversial stake in ITV.

Rumours have been mounting over possible buyers for the 17.9% holding after Sky was told by the Government to sell down the stake earlier this year. The group - speculated to have been contacted by channel Five owner RTL over the stake - has given little away over its intentions, expect to confirm that it intends to fight the Government’s decision at an appeal hearing starting in June.

With the financial hit now behind it after announcing a £353 million write-down on the stake at the interim stage, Sky’s third quarter figures will see attention return to its progress on growing and keeping customers.

This time last year, the group revealed a “churn” rate of 13.7% - far higher than the group’s 10% target and up from the 11.9% seen in the previous quarter.

It was largely down to Sky’s decision to reduce the discounts offered in a bid to dissuade subscribers from leaving, only to return on a lower rate. As predicted by the group, the churn rate has since been gradually reducing and even hit its target of 10% in the final three months of last year.

The market will be looking for continued stabilisation of churn, as well as progress on net customer additions - those joining the group, less those leaving. Analysts are forecasting net additions of 57,000 in the three months to March 31, up 12% year-on-year. Underlying operating profits of £208 million are expected, while the market has pencilled in group sales of £1.26 billion.

But competition appears to be back on with cable firm Virgin Media after the group recently revealed a recovery in customer growth. The group had suffered significantly after its high profile spat last year with Sky, which led to the withdrawal of Sky’s basic channels from Virgin Media, including hit shows such as 24.

Now with two straight quarters of customer growth under its belt, Virgin Media is getting back on track and this may present a competitive headache to Sky over the months ahead. Meanwhile, the firm also has to contend with the impact of general belt-tightening among consumers and the market will be eager for any comments on prospects amid a spending downturn.