City diary: Week ahead in the markets

 

Vodafone, Mothercare and Scottish & Southern Energy are among the top companies due to post financial results next week.

Calendar

 

MONDAY

No major corporate or economic news is scheduled.

 

TUESDAY

Mobile phone giant Vodafone should be in upbeat mood when it reveals full year results.

Earnings guidance has already been upgraded twice, with the latest increase in February pointing towards underlying profits at the top end of a range of between £11.8bn and £12.2bn.

Vodafone also solved one of its major strategic headaches in April with the sale of its 44% stake in French mobile phone group SFR. That sale raised £7bn, of which £4bn is earmarked to be handed back to shareholders.

Vodafone's other major strategic chestnut is its 45% stake in US mobile giant Verizon Wireless. It is the junior partner to US phone group Verizon and Vodafone chief executive Vittorio Colao has made it clear he does not like owning sizeable stakes in companies where it is not in control, which has led to speculation that it may exit the venture.

But with the only realistic buyer being its US partner, some analysts doubt whether it could get full value for its stake if it did decide to sell.

Some of the pressure has eased as observers expect Verizon Wireless to start to pay a dividend soon, which would at least give Vodafone some cash return on its investment. It could also mean a big hike in the dividend the UK company pays to its own shareholders.

On the operational front, brokers expect good growth in the emerging markets of South Africa, Turkey and India to offset sluggish figures in Europe, especially the struggling southern countries.

Data demand will be keenly watched as the growth in smartphones, such as Apple's iPhone and new Android-based handsets, has exploded over recent months. Brokers expect this to be a major plus for Vodafone as the quality of the network becomes more important and eases pressure on prices.

Consensus forecasts are for revenues for the year to March 2011 to rise by 2% to £45.5bn. Free cash flow is forecast at £6.7bn.

Britain's second largest pub firm Enterprise Inns is expected to report a drop in profits at the half-year stage.

But the outlook for the full year is still positive, analysts added, as the Easter holiday and royal wedding bank holiday landed in the second half of the year.

City analysts expect to see some recovery in trade since the first quarter of 2011, in light of improved beer sales reported by the British Beer and Pub Association.

Enterprise saw revenues decline last year, in line with the rest of the pub trade, which is suffering at the hands of increased competition from cheap supermarket deals.

Management at Enterprise, which owns more than 6,500 leasehold and tenanted pubs, is aiming for flat quarterly like-for-like income by the end of the year as they plan to sell 450 to 500 tail-end pubs, invest £60m in food and improve recruitment and training. The group is on track to hit its disposal target of £250m this year.

Analysts have forecast pre-tax profits of £70m for the six months to March, down on £86m last year and based on revenues of £338m, which compare with £371m a year earlier.

Douglas Jack, analyst at brokers Numis, said evidence of earnings stabilising in the interim results was likely to support share performance on the day.

But he warned: 'A strong recovery needs evidence that this is sustainable.'

Directory services firm Yell has already warned it expects a drop in earnings and revenues in its full-year results.

The owner of Yellow Pages and directory businesses in Spain and North America has suffered in recent years as its print business has been hit by competition from the internet.

Yell's shares have plunged nearly 90% over the last year as the group battles to overcome its huge debt mountain, which analysts expect to come in at £2.8bn for the year to March.

The group is focusing on its website Yell.com, as it pins its hopes on digital revenues offsetting the drop in print takings.

But chief executive Mike Pocock is unlikely to reveal too much as he plans to unveil the results of a strategic review over the summer. The company may expand on some of the details it has already hinted at, such as improved management of the print division and the boosting of digital media revenues. The company has also suggested it will look to cut costs across the group.

Yell is expected to deliver revenues of £1.9bn for the year ended March 31, down on £2.1bn the previous year, while underlying earnings are forecast to be £514m, down on £620m.

Lorna Tilbian, analyst at Numis, said if the share price strengthens, management could issue a cash-call through a share placing to tackle the group debt.

Ms Tilbian warned: 'We believe the structural threat facing Yell's business model has increased during the downturn as competition for consumer eyeballs has intensified in the local search market.'

Official figures are expected to show the rate of inflation increased to 4.2% in April as surging oil prices continue to exert pressure on the cost of living.

Inflation unexpectedly slowed from 4.4% to 4% in March, as hard-pressed retailers slashed prices to pull in cautious consumers.

But commentators and policymakers at the Bank of England have warned the cost of living is likely to peak at 5% before it starts to retreat back to the Government's 2% target over the next two years.

Oil prices continued to climb in April as civil war in Libya constricted supplies, while indicators from the British Retail Consortium (BRC) showed food prices rising.

As a result, economists widely expect the Office for National Statistics (ONS) to confirm inflation returned to 4.2% in April.

Howard Archer, chief UK and European economist at IHS Global Insight, said: 'We suspect inflation eased back in March partly due to the fact that Easter occurred in April in 2011 but in March in 2010. This is likely to have led to different timings in the seasonal rises of some prices, for example air fares and hotels.

'Furthermore, petrol prices rose further in April, while food prices also likely increased.'

Looking further ahead, Mr Archer expects inflation to continue rising - particularly after the Bank's warning that utility bills could rise by as much as 15%.

He said: 'Consumer price inflation will hopefully gradually start trending lower in the final months of 2011 as the upward impact from VAT developments, high energy, commodity and food prices, and sterling's past sharp depreciation wanes.'

Nick Raynor, investment adviser at online broker The Share Centre, said: 'If last month's pattern of falling inflation rates continued into April, then pressure on the Bank of England to raise rates will ease.'

Smiths Group and Aviva will put out trading statements.

 

WEDNESDAY

Struggling retailer Mothercare is expected to reveal a slump in full-year profits, amid speculation it is planning to increase the rate of store closures.

The retailer, which has 377 Mothercare and Early Learning Centre stores in the UK and Ireland, has issued two profit warnings this year as it scraps for trade amid tough competition on the high street.

Analysts expect operating profits to fall 13% to £29.7m after like-for-like sales for the year to March 26 were down 4%.

Mothercare was particularly badly affected by the snow over December, which stopped customers driving to its bigger out-of-town stores. Sales of toys in the run up to Christmas were badly affected.

Its margins, which were already under pressure from competition by supermarkets and online retailers, were squeezed further in the new year as it was forced to put on discounts to clear stock amid weak demand from customers.

The group is expected to update on its property strategy as it looks for cost savings to offset rising input costs.

It closed 26 smaller stores over the past year and opened 12 larger parenting centres as part of its ongoing plans to adjust its property portfolio.

It has already announced plans to close 30 stores a year for the next two years, but media reports suggest that Mothercare has drawn up a list of 121 UK outlets that could be closed. These include 32 loss-making shops that are a priority to shut, and a longer list of shops to sell if the right price is offered.

While its UK business is suffering, overseas the company is booming, led by 47% growth in India, China and Australia. Sales at its international arm exceeded the retailer's takings on the UK high street last year.

The number of unemployed people in the UK is expected to have dropped again in the three months to March, but economists believe this trend is likely to reverse.

Unemployment is forecast to have fallen by around 17,000, to 2.475m in the period, a rate of 7.8%, while the number of people in work is expected to increase by 120,000 to 29.2m.

The number claiming Jobseeker's Allowance is also expected to have declined by between 4,000 and 10,000.

But Howard Archer of IHS Global Insight warned unemployment is likely to head up over the coming months despite the firmer labour market data.

He said: 'We suspect that likely below-trend growth will mean that the private sector will be unable to fully compensate for the increasing job losses in the public sector that will result from the fiscal squeeze that is now really kicking in.'

Elsewhere, figures on average earnings for March will be offered. A toxic combination of muted wage growth and soaring inflation has clamped down on household spending power in recent months and the effect is spilling over to all aspects of the economy.

City analysts expect average weekly earnings growth in the three months to March to be around 2.3% to 2.4%, up from 2.2% growth in the three months to February.

Philip Shaw, chief economist at Investec, said 2.4% growth would be the highest reading in 10 months, but warned 'this would still be a level with benign medium-term implications for inflation'.

The Bank of England will release minutes of May's MPC meeting to set interest rates.

Compass Group is due to publish half-year results.

 

THURSDAY

A combination of a late Easter, record-breaking sunny weather and the royal wedding is expected to have boosted the retail sales performance in April.

Retailers enjoyed a slight 0.2% bounceback in sales volumes in March, following February's shock 0.9% decline.

April surveys released so far have been buoyant, with the BRC showing a 5.2% rise in like-for-like sales values as customers splashed out on barbecue food and outdoor clothing.

Forecasts for April sales volumes range from a 0.4% month-on-month increase to a 1% surge as the royal wedding and late Easter also boosted business.

However, economists followed the BRC in warning the spike is likely to be temporary as underlying problems remain on the high street.

But Philip Shaw, chief economist at Investec, who has forecast a 0.4% increase, said the one-off factors meant the figures must be carefully interpreted.

He said: 'Certainly a stretched household balance sheet will subdue consumer spending in 2011, but there may also be something of a recovery from the start of the year as consumers move out of the VAT shadow.'

Howard Archer of IHS Global Insight, who has forecast 1% volume growth, was also cautious. He said: 'While welcome, any spike up in retail sales in April should not be taken as a sign that the consumer is roaring back to life.

'What it would suggest is that pressurised consumers need a particularly favourable set of circumstances to part with their cash. And we suspect that consumers are likely to keep a tight grip on their purse strings over the coming months.'

RICS will release its constuction market survey for the first quarter of 2011.

Cairn Energy is scheduled to publish a trading statement.

 

FRIDAY

Scottish & Southern Energy customers will be looking for signs of further bill hikes when the gas and electricity supplier reports its full-year results.

SSE, the UK's second biggest energy firm with 9.3m customer accounts, reported a drop in profits in the six months to September and blamed the plunge on soaring wholesale gas prices.

The company was the first UK energy supplier to raise bills, lifting gas prices by 9.4% on December 1, which is expected to keep SSE on course to meet analysts' forecasts for full-year profits of around £1.3bn.

SSE employs more than 20,000 people and supplies electricity and gas as Southern Electric, SWALEC, Scottish Hydro Electric and Atlantic.

The Perth-based company is likely to follow in the footsteps of British Gas parent Centrica and highlight the impact of the Government's oil and gas tax hike.

Centrica warned the decision by Chancellor George Osborne to increase tax on oil and gas production in the North Sea from 20% to 32% could lead to further bill hikes.

Scottish & Southern Energy last year joined other utility giants by buying gas fields in the North Sea, paying £277m for the assets of US company Hess. However, the investment may not be significant enough for the tax hike to represent an issue.

Swiss bank Credit Suisse has forecast pre-tax profits of £1.25bn, up from £1.24bn last year. Mark Freshney, analyst at Credit Suisse, said SSE is likely to benefit from price hikes over the next two years.

Mr Freshney said: 'The stock is our preferred UK utility, and we expect commentary at results to provide comfort SSE has reached inflexion point.'

The Council of Mortgage Lenders will have mortgage lending figures for April.

Scottish investment firm Alliance Trust is set to hold its annual meeting.

 
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