City diary: Week ahead in the markets

By This Is Money
Updated: 06:05 EDT, 3 February 2011

Oil majors Royal Dutch Shell and BP will kick off the City's annual results season next week, with the latter due to end its current suspension of dividend payments following the Gulf of Mexico disaster.

MONDAY

Expectations of Ryanair's third quarter figures have been dampened following easyJet's recent gloomy bulletin on the impact of soaring fuel prices and last month's travel disruption.

Analysts have sent out a flurry of forecast changes for Ryanair following the update from easyJet, which revealed a £31m hit from snow and strike action and warned half-year losses were expected to double due to oil prices.

Experts do not believe Ryanair will have been as badly affected by the snow and European strikes as easyJet, though they are still pencilling in a sizeable impact.

Citigroup analysts estimate £12.9m in lost profit and revenues, while Deutsche Bank experts believe it could be as high as £30.1m.

The impact is expected to see third quarter losses widen to £21.5m against £9.5m a year earlier, according to Citi.

Full year forecasts have also come down as a result and Ryanair may trim its guidance from the previous range of €380m to €400m.

However, the group is seen as better shielded from fuel price hikes than easyJet. EasyJet raised the alarm over a 32% surge in fuel costs, but has been left more exposed as it is 70% hedged compared with at least 90% at Ryanair.

This will fail to ease concerns over the impact going forward, as both budget airlines are likely to struggle to recoup costs through higher ticket prices.

Extra charges will also be in sharp focus after easyJet reported a drop due to fewer passengers checking-in baggage, signalling that fliers may be getting weary of forking out additional fees.

Economic news: The Land Registry will issue December house price data.

TUESDAY

Embattled oil giant BP will take another step in its rehabilitation if it delivers on current City expectations and reinstates dividend payments alongside the publication of its full-year results.

The return of BP's dividend following its suspension in the summer due to the Deepwater Horizon disaster would be a key development for pension holders as well as investors given the stock previously accounted for an estimated one in every six pension pounds invested.

Analysts at Collins Stewart anticipate the quarterly dividend will be around seven cents a share, half the level announced in April.

BP upped its estimate of the bill to cover the cost of the oil spill to £25bn in November, but analysts do not expect this to increase and have latched on to recent signs that only half of the £12.6bn compensation fund will be required.

The financial hit from the oil spill will offset underlying replacement cost profits of £13.2bn for the full year. Fourth quarter profits of around £3.1bn would represent a 15% improvement on a year ago but come in 9% lower than the previous quarter.

The company has been able to benefit from a gradual increase in oil prices over 2010, which hit $90 a barrel at around the year end. Refining margins have also shown improvement.

But production is likely to be 10% lower than a year earlier due to the impact of the US drilling moratorium and asset disposals following the disaster, while extended maintenance periods will also impact output.

As well as the restoration of the dividend, the City will be looking for an update on the company's strategic overhaul.

In the words of new chief executive Bob Dudley, the firm is on a 'journey to re-establish trust in BP around the world - especially the US'.

It suffered a public relations disaster after the explosion on the Deepwater Horizon rig last April which killed 11 people and dumped millions of gallons of oil into the Gulf of Mexico.

But from an investors' perspective, the company has started the year relatively well. The market gave a warm welcome earlier this month to BP's £10bn deal with Russian oil giant Rosneft to form an Arctic exploration alliance. Analysts expect the Russian deal will help the company recoup some of the losses incurred from asset disposals.

And the likelihood of a return to dividend payments - which were scrapped at the height of the crisis - is high, according to analysts, although at a lower rate.

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said: 'The share price has already rebounded from its 2010 lows, and at the moment the emergency fund appears to be adequately sufficient to counter future claims.

'There is a further cost, however, in building this fund - asset disposals have been made which reduce BP's capacity in the shorter term. However, some of this could be regained if the proposed deal with Rosneft of Russia progresses.

'In addition, there are strong hopes that the new chief executive will use the results to announce the resumption of the dividend, albeit at a lower rate than before.'

He added: 'The recent strength in the oil price should prove a tailwind for profits, such that overall the general market voice remains unaltered on BP - the shares are a buy.'

Upmarket online retailer Ocado is due to report its maiden set of full-year figures since listing on the stock market last July.

The group, which has a delivery deal with Waitrose, had a rocky start to life as a public company, but shares have staged a remarkable rally in recent weeks.

Much of Ocado's recovery has been spurred on by persistent takeover talk, with speculation suggesting it could be in the sights of supermarket Morrisons.

Analysts remain sceptical that any bid will materialise, but this has failed to hold the rally back, with solid Christmas trading figures fuelling gains.

The shares hike has made up for the company's disappointing flotation. Hatfield-based Ocado was forced to slash its float price to 180p, down from initial aims for between 200p and 275p on concerns over its valuation. The stock then languished below the 180p float price for months, going as low as 120.9p in October.

Having recently hit 246p, Ocado has begun to redeem itself. It had a strong Christmas, reporting gross sales of £50.9m in the four weeks to December 26, up 26.7% on a year earlier.

However, the firm is yet to report a profit since launch more than 10 years ago. And analysts are not expecting a profit in these figures, with most pencilling in pre-tax losses of around £9.7m, but many are hopeful it will turn the corner in the first half of this financial year at the operating level.

The results also mark an important milestone from a shares perspective, as major shareholder John Lewis is free to reduce its 11% stake after the annual results.

This could free-up its shareholder base, which currently sees 10 investors hold around 80% of the equity.

ARM Holdings is also scheduled to report fourth quarter results, and National Grid will put out a trading statement.

Economic news: Nationwide will issue house price figures. Bank of England lending figures and bank and building society deposit data are also due.

WEDNESDAY

Standard Life and ICAP will issue trading statements.

Economic news: Scottish retail sales figures for the fourth quarter of 2010.

THURSDAY

Royal Dutch Shell has had a more sedate year than rival BP and analysts have forecast full year pre-tax profits of around £18bn, including a year-on-year rise in fourth quarter earnings of £2.9bn.

The company, which reports on Thursday, has benefited from higher oil prices and a hike in production levels, as well as a £2.2bn cost-saving plan, which saw 7,000 jobs go.

Gordon Gray, analyst at Collins Stewart, said: 'Overall, we don't expect anything in the fourth quarter performance which should overly worry investors.'

Full-year results from pharmaceuticals firm GlaxoSmithKline are expected to be hit hard by multi-billion pound legal charges relating to its controversial diabetes drug Avandia.

Glaxo shocked the market earlier this month when it revealed a record fourth quarter impact of £2.2bn in costs to settle legal disputes.

This comes after a £1.57bn charge in the second quarter, which was announced in July, as Glaxo has faced lawsuits alleging the drug harms health, in particular that it increases the risk of heart attack.

Shares in Glaxo have slumped to levels not seen for five months since the news, as investors have digested the likely impact on Glaxo's results. Most analysts are now expecting pre-tax profits to have almost halved to £4.6bn in 2010, down from £8.7bn in 2009, due to the legal costs.

However, sales are forecast to have held firm at £28.4bn.

The legal blow comes at an already challenging time for drugs makers as they grapple with competition from cheaper generic rivals and government pressure on pricing in the new age of austerity.

Close rival AstraZeneca bettered expectations with its 2% rise in full-year profits to £8.2bn, but it confirmed challenges for the year ahead.

Both Glaxo and Astra are slashing costs to offset trading pressures. Glaxo is looking to deliver another £2.2bn of annual savings by 2012, having already cut £1bn in 2009.

The group is headquartered in Brentford, Middlesex, while it has research bases at Stevenage and Ware in Hertfordshire and Harlow in Essex. Its UK manufacturing operations include sites at Ulverston in Cumbria, Montrose, Angus and Irvine in Ayrshire.

Full-year results from consumer products giant Unilever come amid fears of an 'inflationary monsoon' as commodity costs soar.

Recent news of a drop in profit at Unilever's Indian operator Hindustan Unilever due to higher input costs raised concerns for the group, with Unilever buffeted by food price inflation and the knock-on effect of surging oil costs.

Carex and Imperial Leather maker PZ Cussons confirmed the impact of the current oil price bubble when it cautioned over higher costs for some of the key ingredients in its soap products.

Martin Deboo, analyst at Investec Securities, said while Unilever's 2010 figures were unlikely to be hit it would face a difficult 2011.

'We now predict an inflationary monsoon of similar proportions to 2008,' he said. 'Recovering this inflation is going to be a challenge.'

Unilever is behind some of the world's best known consumer brands, such as Dove soap, Sure deodorant, Knorr and Ben & Jerry's.

Its 2010 figures are seen as being largely unaffected so far by soaring costs.

Analysts are expecting Unilever to have grown sales by 4.2% in the fourth quarter of 2010 and by 3.9% over the full-year. Pre-tax profits of £5.2bn are expected for 2010.

But profits may suffer over the year ahead, said Mr Deboo. 'Unilever and chief executive Paul Polman are going to have to make some tough choices between top and bottom line. We expect them to favour the former.'

Vodafone and Compass Group will issue trading statements. TUI Travel will report first quarter results.

FRIDAY

No major corporate news is scheduled.