The Week Ahead: WH Smith, Greggs and Burberry updates due as Direct Line prepares for debut
THE launch of shares in insurer Direct Line Group and updates from WH Smith, Greggs and Burberry will be among the highlights for investors this week.
The flotation of Royal Bank of Scotland’s Direct Line Group insurance arm will offer retail investors the chance to buy shares in what is set to be London’s biggest stock market listing of the year.
Direct Line shares will begin trading on Thursday, priced at between 160p and 195p, according to RBS. This would give the Churchill and Direct Line firm a mid-point valuation of �2.66 billion, at the lower end of City estimates in what has been seen as an attempt to woo investors.
Demand has been strong, according to retail stockbrokers, of which 20 have been appointed to take orders from investors.
Richard Hunter, head of equities at Hargreaves Lansdown, said “thousands” of buyers had registered for shares since the pricing details were announced.
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RBS is floating up to 33% of the business initially, with further tranches to come. The state-owned bank must sell a majority stake in Direct Line Group by the end of next year and divest of the entire company by the end of 2014 under a European-imposed condition of its �45 billion bailout received in 2009.
Retail investors have until Tuesday to apply, but there are seen as equal pros and cons to the investment and while demand from retail investors is said to have been strong, institutional investors are understood to be more sceptical amid concerns over the pressures faced by the insurance market.
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For starters, the float pricing was dealt an immediate blow by the Office of Fair Trading’s announcement on the same day that it was referring the motor insurance industry to the Competition Commission for full investigation, a process which could drag on for up to two years. This puts a question mark over the profitability of Direct Line’s motor insurance business, which represents around 42% of premiums.
There are also concerns over some of Direct Line’s UK businesses, some of which are paying out more in claims than receiving in premiums, and the UK business is also closely tied to the fortunes of the economy as well as external factors such as the weather.
But the group returned to profitability in 2011 and has committed to distributing 50% to 60% of after-tax profit as a dividend, implying a yield of up to 7.5% – an attractive proposition for investors given record low interest rates.
It also has a stable of well-known and established household brands – Direct Line, Churchill, Green Flag, Privilege and NIG – offering insurance on homes, cars, pets, travel and small businesses.
Nick Johnson, analyst at Numis Securities, said he believed the float had been “attractively priced” and that there was potential for costs to be stripped out across Direct Line, which would help offset any trading pressures in areas such as car insurance.
Blockbuster erotic novel Fifty Shades of Grey is expected to have helped retail chain WH Smith deliver a rise in full-year profits when it reports results on Thursday.
Phenomenal demand for author EL James’s racy book – the biggest seller in Britain since records began – and other copycat “passion” books have helped buoy sales for the group’s 600 high street stores.
WH Smith said in August that results for the year would be at the top end of City expectations after seeing improved profit margins at both its high street stores and travel arm, which runs nearly 600 stores in airports, railway stations and motorway service areas.
Analysts are now expecting profits to rise nearly 8% to �100 million in the year to August 31 from �93 million a year earlier.
Under the leadership of highly regarded chief executive Kate Swann, WH Smith is benefiting from selling more higher margin books and stationery and fewer CDs and DVDs.
Its travel business is also making good progress, helped by opening stores overseas.
Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, said the market will be keen for more news on the international business and take-up of its Kobo reader, which it recently launched to compete with Amazon’s Kindle.
Bakery chain Greggs suffered in a rain-soaked first half of the year, but it may serve up an improved performance in Thursday’s third quarter update.
The group, which has 1,600 shops in the UK, saw sales fall 3.5% in the three months to June 30 after record rainfall meant shoppers stayed away from the high street. Half-year profits fell 4.6% to �16.5 million, despite its efforts to keep a lid on costs.
The grim weather meant Greggs was also unable to see the benefits of its recent profile-boosting campaign, which saw it play a key part in convincing Chancellor George Osborne to overturn the Government’s so-called pasty-tax.
Chief executive Ken McMeikan marched on Downing Street to deliver a 300,000-strong petition against plans to charge 20% VAT on its hot pasties and sausage rolls.
Analysts are expecting Greggs to narrow sales declines in the second half, although the tough consumer spending conditions are likely to keep like-for-like results in the red.
Shore Capital retail experts forecast overall second half like-for-like sales to improve to a 1.5% fall, but returning to growth next year if the wider economy also recovers.
But they said that the potential lies in its new stores, with Greggs keeping its focus on expansion in spite of tough trading.
The group has opened 33 more shops than it closed this year and is on course to open a record 90 outlets in 2012. It also recently announced plans for 28 franchise stores in Moto service stations as part of a strategy to expand beyond the UK high street.
Retail analysts at Panmure Gordon said Greggs has “at least six years of strong organic growth ahead of it”.
Luxury goods group Burberry has received a battering on the stock market since news of falling sales last month sparked fears of a slowdown in its key Chinese market.
The fashion firm – whose luxury bags and coats have proved a hit in emerging markets such as China over recent years – saw more than �1 billion wiped off its market value in one day after it warned over profits and said sales had started to fall since early September.
Thursday’s trading update will be pored over for further news on the second quarter sales trend, which suggested Burberry’s rampant growth was coming to an end as China’s powerhouse economy slows.
Shares have slumped by more than a quarter since last month’s sales shock.
The firm said like-for-like sales ground to a halt in the 10 weeks to September 8 and had started to fall over more recent weeks - a marked reversal on the 6% hike seen in the first quarter.
Burberry warned full-year profits would be at the bottom end of expectations - previously for between �407 million and �455 million.
It has shrugged off the economic downturn in the past with stellar sales, thanks largely to its popularity in some of the world’s top shopping cities and soaring demand from emerging markets.
But Burberry admitted its trading conditions were “becoming more challenging”.
Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, said sales may be helped as comparatives ease during the second half.
He added: “Management may move to outline tentative initiatives aimed at easing recent difficulties.
“Previous moves to protect the brand long term and raise product prices could be diluted, with lower price products staying on the shelves for longer.”
Hays and Michael Page will report back from an embattled UK recruitment sector that has been hit hard by swingeing job cuts across the banking sector.
Michael Page International, which offers a third quarter update on Monday, revealed a 50% slide in banking business in the six months to June 30 after groups such as Lloyds, HSBC, Barclays and Royal Bank of Scotland have slashed their workforces in recent years.
The UK, which represents more than a fifth of Michael Page’s total profits, saw revenues drop 10% to �146 million, while gross profits fell 7% to �61.7 million.
A better performance in its overseas markets – especially Asia Pacific – saw overall group profits remain broadly flat at �273.9 million.
Oriel Securities analysts expect the UK to have come under further pressure in the third quarter, pencilling in a 9% slide in gross profits.
They added that the third quarter is “always a difficult period for the region, given the impact of the holiday season”.
Marc Zwartsenburg, head of western European equity products at ING Bank, said in August that Michael Page may even be forced to warn over profits in the second half.
Hays is also likely to highlight the woes in the jobs market when it gives its first quarter update on Tuesday.
It worried the City when it said in August that trading had become even more challenging in the final three months of its financial year to June 3.
Annual results revealed its UK business swung into the red with a �6.5 million loss against �3.6 million profits a year earlier after seeing net income drop 7%.
Bank of America analysts expect no let up for the UK arm, forecasting net fees to be down 3% overall since the year-end, with declines in the UK accelerating to between 10% and 12%.