Market Watch: Rolls-Royce set for turbulence but way ahead clear

Published on 07/02/2009 13:13

AFTER a slow start to the week amid the City snow chaos, the Footsie picked up pace, benefiting from a rebound in the embattled banking sector as it recorded four successive sessions of gains.

With strong advances, thanks in part to another cut in interest rates, to 1%, which helped banks and retailers, the FTSE 100 rose 142.3 points over the week to close at 4291.9.

All eyes will turn to the banks this week as its reporting season gets in full swing. Barclays kicks off the season tomorrow with full-year results that will reveal the extent of the damage from a year of crisis in the banking sector.

Engineering and aerospace giant Rolls-Royce, which posts results on Thursday, is braced for a difficult year as economic uncertainties take a toll on demand. Credit Suisse analyst Steve East is confident over long-term prospects for Rolls despite the potential for near-term volatility.

"With huge barriers to entry, technology leadership, very long product cycles and major recent new platform wins, we expect Rolls-Royce's market share to continue growing for 10 years. However, we expect some volatility in the short-term given that we expect poor air traffic and aircraft order data."

Media group Daily Mail & General Trust is likely to have more grim news on advertising trends when it updates on trading on Wednesday. The group, which last month sold the Evening Standard London daily to the Russian oligarch Alexander Lebedev, has been hit hard as the sliding property market impacts on revenues at its regional arm, Northcliffe.

Although DMGT's national titles have been more resilient, there was more bad news for the sector last week from US newspaper group Gannett, which owns the Newsquest group in the UK.

Panmure Gordon analyst Alex DeGroote said Newsquest's 35% year-on-year fall in total advertising revenues spelt more bad news for Northcliffe, which accounts for around 20% of DMGT's revenues.

He said: "Investors will be very familiar with the sliding advertising revenue performance of regionals overall and the correlation with deteriorating UK macro fundamentals."

In November, the group announced plans to save 100m as advertising markets suffer and costs rose, with 400 posts cut.

Its underlying pre-tax profits fell 9% to 262m in the year to September 28, but during October, growing unemployment and an ailing housing market sent property and recruitment revenues falling 28%.

Household products giant Reckitt Benckiser will reveal how it is coping with the consumer downturn when it publishes its full-year results on Wednesday.

In October the Vanish-to-Strepsils firm posted a 12% rise in third-quarter profits and hiked full-year targets after sales beat its expectations.

The group raised its like-for-like revenues goal to 9%, from between 7% and 8% previously, after an unexpectedly strong 10% surge in comparable sales, while new launches such as Finish Quantum dishwasher detergent and Vanish Intelligence helped boost performance.

But shares in Reckitt dropped 4% earlier this week as fellow consumer goods Unilever reported falling sales volumes prompting investor fears that the impact of the deepening global slump would be sector-wide.

The news from Unilever signalled worsening conditions for consumer-facing businesses during the recession, but Shore Capital analysts called Reckitt the "class act" among the consumer groups they cover.

Citing the "industry-leading" management team, innovation pipeline and volume growth, they said the group is capable of retaining revenue and expanding margins by developing its higher-margin consumer healthcare brands.

Reckitt has a portfolio of brands including well-known food products such as French's yellow mustard, and health and personal care brands including Nurofen, Lemsip and a range of cough remedies.

The City is expecting adjusted operating profit of between 1.47bn and 1.53bn for 2008. The drop in the value of the pound since the last inflation report in November is thought to be the largest since the Bank was granted independence in 1997.

Its impact was confirmed yesterday when the British Retail Consortium said the pound's slump was beginning to push up some shop prices.

But the Bank's Monetary Policy Committee (MPC) said on announcing its rates decision that the pound's slump would provide a "considerable stimulus to activity as the year progressed".

Its inflation report, however, will likely show a far lower projection for economic growth than the November forecast.

Week ahead

TOMORROW

Barclays (finals); Northumbrian Water (trading update)

TUESDAY

Cable & Wireless (trading update)

WEDNESDAY

Hargreaves Lansdown, Morse (interims); DMGT, WS Atkins (trading update); Reckitt Benckiser (finals)

THURSDAY

Rolls-Royce (finals); BT, Diageo (interims); Thomas Cook (trading update)

FRIDAY

Beazley (finals)