The Week Ahead: ITV, Rolls Royce, Morrison, ECB and UK GDP data
It’s Monday morning. City A.M. looks ahead at what this week has in store.
China Trade for February
This morning – The Chinese economy finished 2020 on a strong note, its surplus hitting a record high in December. Exports rose by 18.1 per cent, slightly down from November’s 21.1 per cent but still better than expected, and the seventh successive month of growth.
“The strength was primarily as a result of the continued lockdowns in the rest of the world saw the export of PPE and other medical related products do well,” explained Michael Hewson, chief market analyst at CMC Markets UK in London, this morning.
As vaccines continue to get rolled out across the world this trend could well slow in the coming months.
“In the latest trade numbers this week for February the overall numbers will also cover the lead up to Chinese New Year, which could well help boost the imports numbers, given they cover the January period as well,” Hewson shared with City A.M. this morning.
With imports rising 6.5 per cent in December, he thinks it would be “very surprising if we didn’t get a strong number this week,” with expectations of a 15.8 per cent rise.
“This bounce will also be skewed due to the comparison with February last year when the Chinese economy was locked down, due to its own set of coronavirus restrictions. Exports are also set to increase with a 41 per cent rise year on year. The timing of Chinese New Year will also be a factor in this week’s combined numbers for January and February,” he added.
ITV
Tomorrow – When ITV reported its H1 numbers in August both sides of its business were impacted as a result of the various shutdowns of the UK economy, with total advertising revenue for the period declining 21 per cent to £671m, while broadcast revenue dropped 17 per cent to £824m.
ITV Studios, normally an outperformer saw a 17 per cent decline to £630m due to having to pause its production capabilities due to various lockdown measures. In Q3 this deteriorated further on a percentage basis with a 19 per cent decline to £902m.
“Overall, there wasn’t that much to cheer even if advertising trends did improve in July and August, notably with respect to travel companies advertising getaways, and car and indoor furnishing companies boosting ad spend,” commented Hewson.
“In order to preserve cash, the company pulled its interim dividend while saying it would continue to focus on reducing costs by £60m on a temporary basis, with a view to making around half of those savings permanent,” he shared with City A.M.
In Q3, the picture improved a little as production resumed, albeit with higher costs due to Covid-19 mitigation measures. Advertising trends also improved with total advertising revenue improving slightly to be down 16% in Q3. In terms of the outlook the picture for Q4 was more optimistic with an expectation that advertising revenue would rise by 4 per cent.
“While the return of sport to our screens will have helped boost ITVs advertising revenues in the second half, and Britbox revenues are likely to see an improvement, it is likely to be an uphill struggle for this terrestrial broadcaster unless advertising revenue shows evidence of a sustained pickup,” Hewson noted.
Rolls Royce
Thursday – At one point there was some concern as to whether Rolls Royce would be able to survive the in the wake of the collapse in air travel as a result of the pandemic.
With the company reliant for 50 per cent of its revenue on aviation air miles the company was facing a cash crunch. In October, Rolls Royce shares fell to their lowest levels since 2004, after the the company announced its plans to raise extra cash to bolster its finances.
The launch of a £1bn bond issue as well as a £2bn 10 for 3 rights issue at a 41 per cent discount to 130p was eventually taken up by shareholders, and along with the progress on the vaccine rollout the car giant has seen a decent rebound in the share price, Hewson pointed out.
“The company still isn’t out of the woods yet announcing that it is likely going to have shut its factories in the summer for two weeks to help stem the losses,” he continued, adding that “at its last trading update the company estimated a free cashflow outflow of £2bn.
This is based on 2021 wide body engine flying hours of 55 per cent of the levels of 2019, with an expectation of turning cash flow positive at the end of the second half of the next fiscal year.
“This seems a touch optimistic, given that air travel is unlikely to be able to return to any semblance of normal this year. And that’s even before allowing for the various cuts to headcount and any planned asset disposals,” Hewson said.
In 2019, annual revenues came in at £15.45bn, with half of that coming from maintenance and other aftermarket services. Rolls Royce will do well to get anywhere near to half that number for 2020, he added.
Morrison
Thursday – The first week of January generally tends to be a decent bellwether for economic activity over the Christmas and New Year period, and Morrison was quick out of the blocks at the beginning of the year with a rise of 9.3 per cent in like for like sales over the festive period, which augurs well for a decent full year performance.
The digital business has been the main beneficiary over the past 12 months, Hewson stressed, and in the early of its final quarter these saw a rise of 24 per cent, over the same period a year ago, helped largely by the Morrisons on Amazon service, as well as the new relationship with Deliveroo.
Costs have risen as a result of the pandemic, with Morrisons saying that these are likely to be higher by £50m by the end of the financial year, taking the total cost to £280m for 2020/21, due to the tighter restrictions since December.
Hewson said management still expects pre-tax profit to come in between £420m and £440m, before the £230m deduction in respect of the repayment of business rates for the year 2020/21.
“On a more positive note, Morrisons is also expected to benefit from the decision earlier this month to extend its supply agreement with McColls for a further three years,” he noted.
ECB rate meeting
Thursday – Over the last 12 months the ECB has really been the only game in town when it comes to supporting the European economy, despite the lack of urgency from EU policymakers in taking fiscal actions of their own, Hewson remarked.
“They’ve not been helped by a weaker US dollar either which recently pushed the Euro up above the 1.2000 level and added to the deflationary pressure on an economy that has tipped back into recession and is unlikely to recover much in terms of its services sector before the second half of 2021, due to tighter lockdown restrictions that have been in place for most of Q4 last year, and look to get extended into Q2 of this year,” he explained.
Hewson called “one saving grace” the performance of the manufacturing sector which appears to be performing well.
To offset the weakness in the services sector which is struggling with various lockdown restrictions the central bank expanded its Pandemic Emergency Asset Purchase program in December for the second time in 2020, from €1.35 trillion to €1.85 trillion, as well as extending it another 9 months until March 2022.
“While this helps buy time, along with new loan programs in the form of TLTRO’s the ECB can’t act alone given it is already operating at the limits of its mandate. It needs help on a much bigger fiscal scale, which at the moment is only just coming in a fairly limited form in the form of the EU recovery fund, and only €390bn of the €750bn of that fund, in the form of grants, far too low to really make much of a difference,” Hewson said.
“While the ECB has gone to great lengths to insist that their monetary toolbox still has plenty of ammunition to deal with the prospect of a double-dip recession, the rise of the euro and a weaker US dollar is not helping their cause, nor is a sharp rise in borrowing costs, which could cause problems for the like of southern European countries with large debt burdens,” he added.
The huge fiscal stimulus plan in the US is starting to prompt concerns of a sharp rise in real yields which central bankers appear to have been slow in pushing back against.
With the Federal Reserve solely focussed on its role as the US central banker, it appears to have forgotten it is also the world’s central banker. The ripple out effect of the recent sharp rise in yields gives the ECB a real problem in trying to keep a lid on borrowing costs.
“While we are seeing localised measures to address the pandemic, the slow response in rolling out the vaccine in Europe is making life much more perilous for the fragile economies of Spain, Italy and Greece who are in the most economic need. With the damage from the pandemic likely to extend well into 2021, Europe really needs to get its act together, otherwise further economic schisms could open up further over the next 12 months,” Hewson noted.
UK GDP
Friday – Having seen a gain of 1.2 per cent in December, the monthly GDP number for January is likely to be “a sobering affair,” as Hewson puts it, given the tighter measures that were imposed at the beginning of the month.
“Services in particular are expected to take a hammering, and while the UK economy appears to have avoided the dreaded double dip recession, the only unknown about the contraction we’re about to see in the first quarter of 2021 is how big is it likely to be,” he said.
The Bank of England estimates a contraction of 4 per cent for Q1, which seems quite modest given that non-essential retail isn’t expected to return until 12 April. Index of services saw a 1.7 per cent rise in December. This is expected to reverse in the latest numbers for January, Hewson concluded.