Although it is almost the height of summer, with the City still basking in high temperatures and sunny weather, the corporate diary continues to tick over with a number of FTSE 100 firms reporting including restored blue chip Royal Mail PLC (LON:RMG) and restructuring Unilever plc (LON:ULVR).
Royal Mail has a parcel-full of problems and the group’s first quarter trading update should once again see shareholders hoping growth in the parcels business will compensate for the decline in letter delivery volumes.
In its full-year results announcement in May, Royal Mail’s management, according to Liberum Capital Markets, “sounded a clear note of caution on Letters revenue”.
“The recent introduction of tighter rules on customer marketing with the new GDPR [data protection] rules has an uncertain impact on marketing communications activity. At the very least, we expect the uncertainty to dampen activity,” Liberum predicted.
“Combined with more general business uncertainty, this is expected to push the current year trend in Letters volumes to (or beyond) the worse end of management’s long-term guidance range of annual falls between 4% and 6%,” the broker added.
Liberum said Royal Mail has had little success over the past four years in growing parcels revenue more quickly and it does not expect this to change much “even with the momentum from last year seeing the strongest Parcels revenue growth in four years”.
Growth in tracked products has been a highlight but even here, grumpy old Liberum notes, the comparative figures from a year ago start to get tougher.
Analysts will likely be keeping an eye out for progress on targeted productivity improvements, which Royal Mail said in May would be towards the upper end of the targeted 2-3% range.
Unilever: I can’t believe it’s not better
RBC thinks Unilever has set itself up for a fall by setting sales and margin targets following the bid approach by Kraft Heinz.
“Unilever’s decision to set sales and margin targets following 2017’s approach from Kraft Heinz risks, we think, delivering the opposite of under-promising and over-delivering,” the broker said, ahead of the Anglo-Dutch consumer goods giant’s interims.
“The combination of 3-5% organic revenue growth and 20% (pre-restructuring) EBIT margin by 2020 feels ambitious to us and a long way from being a fait accompli. For instance, the fact that management felt the need to warn investors that its organic sales growth for 1H 2018 would likely undershoot the 3-5% range because of an 11 day transport strike in Brazil suggests to us that there’s very little slack built into Unilever’s expectations,” it added.
The company has agreed to sell its spreads business to private equity firm KKR for €6.83bn and had previously indicated it expected to complete the transaction “in the middle of the year”.
We are now in the middle of the year so shareholders would be justified in expecting an update.
Analysts, meanwhile, will be keeping an eye on whether Unilever is sacrificing margin for volume.
The consumer goods giant raised prices by just 0.1% in the first quarter, a marked reversal from the trend seen in the third quarter of 2016 during its spat with Tesco. This was seen to suggest that Unilever may be losing its pricing power following a dispute with Tesco over raising the price of Marmite.
Can easyJet continue to fly high?
easyJet PLC (LON:EZJ) will issue a trading update on Wednesday as the airline’s peak summer season progresses.
The FTSE 100-listed firm flew 7.9mln passengers in June 2018, up from 7.7mln at the same month a year ago. The airline’s load factor- the ration of passengers to available seats – rose to 95.4% from 94.8%.
In May, easyJet reported a winter profit, due to record passenger numbers and revenues, and predicted that its full-year pre-tax profit will be between £530mln and £580mln, compared to £480mln last year.
Analysts at Liberum Capital remain concerned about easyJet’s unit cost trends, but they still upgraded their rating for the airline to ‘hold’ from ‘sell’ at the start of June.
World Cup hopes for Sports Direct
Full-year results from FTSE 250-listed sporting goods retailer Sports Direct will be released on Thursday and investors will be hoping that England’s good run in the World Cup – up to the semi-finals anyway – could have boosted current trading.
George Salmon, equity analyst at Hargreaves Lansdown pointed out that Sports Direct has not updated on trading since half year results in December.
He said; “Back then the group’s strategy to elevate its retail offering, seemed to be showing some early signs of success, with growth in underlying profits despite a sluggish UK performance.
“However, recent conditions on the UK high street have been dire, to put it mildly. The success of the England football team and a bout of nice weather will have done the group a favour, but the plan to become the “Selfridges of Sport” still needs to deliver results.”
The Hargreaves analyst also noted that the last six months has also seen changes in the stakes Sports Direct owns in other businesses, with its holding in department stores group Debenhams PLC (LON:DEB) increased to 29.7%, while its stake in US shoe retailer Finish Line has been sold.
Salmon added: “With Debenhams having had a very tough time this year, watch out for commentary on the strategic investment portfolio.”
Production eyed at Rio Tinto, Anglo American
Mining investors will be looking to shore up their holdings in the coming week with FTSE 100 constituents Anglo-American PLC (LON:AAL) and Rio Tinto PLC (LON:RIO) among a batch due to release production updates.
Attention will be paid to how the ongoing trade spat between the US and China is likely to affect metal prices and any potential knock on effects from tariffs on China’s import of base metals.
With China frequently accounting for around half of global trade in metals such as copper aluminium, nickel, and zinc, an escalation in the dispute in likely to dampen its demand and provide downward pressure on the earnings of both large and medium-sized metal producers.
Rio Tinto will be hoping to provide a boost following a US$3.5bn deal to sell its 40% production stake in Grasberg, the world’s second biggest copper mine, to the Indonesian state mining company PT Inalum.
Meanwhile, investors in Anglo American will be looking for some better news out of its subsidiary De Beers after rough diamond sales from the group fell to US$520mln in April from US$563mln in the second sale of the year.
They may have reason to be optimistic too, as at the time De Beers chief executive Bruce Cleaver said the company had seen good rough diamond demand in the third sales cycles of 2018 as it moved out of the traditionally slower period.
SSE retail spin-off to spark investor interest
SSE and Npower, owned by Germany’s Innogy, want to merge their household energy supply businesses to create an independent company.
The deal was announced last year in the face of tough competition from smaller energy suppliers.
SSE, which will remain in energy networks and power generation after splitting off the supply business, has said it believes the new company will be more focused and deliver cost synergies.
Hargreaves Lansdown's George Salmon said he expects shareholders to give the proposal the green light at the AGM.
“The group’s confident it can realise £175mln of synergies in the move, but as ever with mergers, there’s no guarantee the ‘on paper’ savings make it to reality,” he said.
The company will also release a first quarter trading statement with the focus on whether the company was able to recover after posting a near 39% drop in 2018 profits and losing 430,000 customer accounts.
Government price caps and customers switching to cheaper alternatives have been the biggest challenges for the group, while the milder weather since the end of March will also likely result in reduced energy demand.
In May, the company reported a 4% rise in full-year profits as higher revenues and a strong performance in its new Dee Valley Water business offset higher costs and business rates. The group also unveiled a £100mln investment drive to improve its offering and infrastructure.
In the quarterly update, Investors will be looking out for remarks on the progress on its investments and any guidance for the current fiscal year.
Tough times for RPC
In June some investors focused on a fall in the cash conversion rate published in the final results, although revenues and adjusted pre-tax profits both rose 36%.
Most recently there have been reports that the accounting regulator has asked for clarity on some figures in the annual report.
So the market will be looking for something more positive from the company in its first-quarter update on Wednesday.
Big data week
It is also the week for big UK data, with the latest jobs, inflation and retail sales numbers all due on Tuesday, Wednesday, and Thursday, respectively.
The latest set of GDP and production data suggested that the UK economy should show a bounce back from the weak first-quarter and there should be more of this evidence in the latest set of jobs data.
Helal Miah, investment research analyst at The Share Centre expects the unemployment should hold around the lowly 4.2% rate, while all eyes will still be on the rate of wage growth, which has been around 2.5% all year, still slightly lagging inflation.
Miah pointed out that expectations are the June retail price index should increase to around 2.6% year-on-year after a few months of easing pricing pressures as the leisure, culture and restaurants faced softer cost pressures.
He added: “Should the inflation rate tick upwards, the much touted August rate hike will be further priced in but the level of real income rises will come under scrutiny again if the level of wage growth comes out soft.”
Meanwhile, after a relatively poor set of figures from the UK high street in the first quarter, retail sales figures during April and May were much improved which was put down partly to pent up demand coming through after the poor weather earlier in the year.
The Share Centre analyst said; “There are expectations hope that the hot June weather and the so far successful performance of our football team that has given a big boost to spending on summer clothing ranges, barbeques, beers, and England football paraphernalia.
“More importantly a good figure would help cement the view that the economy as a whole is experiencing a modest bounce back after the weak first quarter.”
Significant announcements expected this week:
Monday July 16:
Production Update: Rio Tinto PLC (Q2) (LON:RIO)
Finals: WH Ireland Group PLC (LON:WHI)
Economic data: US retail sales; US business inventories
Tuesday July 17:
Trading update: Royal Mail Group PLC (Q1) (LON:RMG), TalkTalk Group PLC (LON:TALK), Dairy Crest Group PLC (Q1) (LON:DCG), Galiford Try PLC (LON:GFRD), SSP Group PLC (LON:SSP), Clinigen PLC (LON:CLIN), City of London Investment Group PLC (LON:CLIG), Scapa PLC (LON:SCPA), Petropavlovsk PLC (LON:POG)
Economic data: UK unemployment; UK average earnings; US industrial production; US capacity utilisation
Wednesday July 18:
Trading updates: easyJet PLC (Q3) (LON:EZJ), Severn Trent PLC (Q1) (LON:SVT), RPC Group PLC (Q1) (LON:RPC), GVC Holdings PLC (LON:GVC), Hochschild Mining PLC (LON:HOC), Premier Foods PLC (LON:PFD), Carr’s Group PLC (LON:CARR), Close Brothers Group PLC (LON:CBG), Alliance Pharma plc (LON:APH), Connect Group PLC (LON:CNCT), New River REIT PLC (LON:NRR)
Economic data: UK CPI, RPI, PPI, HPI inflation; US housing starts
Thursday July 19:
Economic data: UK retail sales; US weekly jobless claims; US Philadelphia Fed index
Friday July 20:
Interims: Acacia Mining PLC (LON:ACAA), Beazley PLC (LON:BZY)
Economic data: UK public sector finances; Baker-Hughes US rig count