Proactive Investors -
- FTSE 100 opens lower, down 32 points, ex-divs weigh
- Fed minutes show more rate rises to come in the US
- Rolls-Royce (LON:RR) shares power ahead as profits top forecasts
Losses narrow at Heathrow
Heathrow Airport has reported narrowed underlying losses in 2022 amid a bounce back in travel demand, but said results were weighed on by surging cost pressures and lower than expected passenger numbers.
The group reported an underlying pre-tax loss of £684mln for last year, against a loss of £1.27bn in 2021.
It said no dividends were paid in 2022 and none are planned for 2023 as it continues to rebuild after the industry was battered by pandemic travel restrictions.
The figures also come after last summer's major disruption for airports such as Heathrow as the aviation sector struggled to cope with staff shortages and travellers were met with sudden flight cancellations and severe delays.
Passenger numbers trebled to 61.6mln, up by 42.2mln on a Covid-impacted 2021, but were still down 24% from record year 2019, when Heathrow booked 80.9mln passengers.
FTSE weaker but Rolls-Royce soars
London’s blue chips remained weaker in early trading with ex-dividends weighing along with concerns that US interest rates are set to rise further following the release of the FOMC minutes on Wednesday.
At 9.00am the FTSE 100 was at 7,905.98, down 24.65, or 0.31% although the FTSE 250 jumped to 19,855.01, up 174.72 points, or 0.89%.
Susannah Streeter, head of money and markets, Hargreaves Lansdown said, "’Investors are finding it hard to shake off the funk that’s descended over the prospect of interest rates going higher and hanging around for longer. There were few crumbs of comfort from the closely watched minutes of the US Federal Open Markets Committee, with the determination of policymakers to stay tough on inflation clear."
Neil Wilson at markets.com commented, “5% for one year. No wonder stocks are under pressure when the 1yr Treasury note yields more than 5.1%, its highest in 22 years. FOMC minutes signalled more rate hikes – and remember those minutes were before the hot data that hit the bull rally in recent days.”
“I think it’s noteworthy that the minutes showed members are worried about the easing of financial conditions that has taken place and warned that inflation was still way too high, at the same time as Jay Powell said financial conditions had tightened and declared disinflation was now the order of the day. It’s all very higher for longer.”
Wilson warned, “It can’t go on forever – American consumers are loading up on debt rather than cutting back, only making problems worse when it does all burst – an even bigger and more damaging recession could be on the way.”
But there was better news on the corporate front. Rolls-Royce Holdings PLC soared 20% after results which beat expectations.
Shore Capital said the results, “show good progress towards improved profitability with Civil Aerospace performing better than expected.”
“Management has updated its guidance to reflect a more optimistic outlook; we expect a small uplift in our EPS forecasts. The investment case remains intact with Rolls-Royce representing a compelling turnaround story.”
Sales of £12.7bn and EBIT of £0.7bn topped Shore’s expectations of £11.7bn and £0.5bn respectively while guidance for 2023 implies upgrades of at least 6% to financial year 2023 EBIT forecasts, analysts at Shore commented.
“Further positive news is that Defence order intake was £5.4bn in 2022, over double the previous year, providing early signs that Defence markets are enjoying elevated demand for products and services as geopolitical uncertainty continues.”
Victoria Scholar, Head of Investment, interactive investor commented, "Investors have fallen out of favour with Rolls-Royce in recent years given its bumpy ride with shares shedding more than 60% over the past five years. However that could be set to change with the CEO shake-up potentially reinvigorating the bull case if he can spearhead a much-needed drastic overhaul."
WPP PLC sat in second spot in the FTSE 100 risers list. Net revenue rose 6.9% to £11.8bn on a like-for-like (LFL) basis, which excludes the impact of acquisitions and exchange rates. Growth was helped by a return to more normal global marketing spending.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown commented, “WPP is a titan of industry. Its sheer size means gaining momentum and getting into shape is a huge challenge, but it’s one the company has risen to.”
“The largest concern for investors was how successful WPP will be in realising its cost efficiencies, with £600m due to be found by 2025. The fact this target remains in focus and on track is a genuine relief.”
“As a media giant, WPP has been stung by a global slowdown in marketing spending brought on by enormous geopolitical and economic stress.”
“By all accounts this looks to be reversing, which has fed into strong growth at the end of the year. To top it off, momentum hasn’t only been achieved, it’s being harnessed, and revenue growth of 3 -5% is expected this year.”
“Investors have been well-rewarded in the form of a hefty share buyback programme, which will go some way to diluting concerns over an over-laden balance sheet.”
Shares rose 5.6% to 1074.50p.
International Consolidated Airlines Group SA rose 3.2% taking from heart from comments from Rolls-Royce that flying hours are set to increase strongly in 2023 as the recovery in international travel continues.
Lloyds Banking Group (LON:LLOY) PLC rose 1.5% on further consideration of its full-year results and as it kicked off its £2bn share buy-back.
But packing firm Mondi 6% and Drax PLC dropped after their trading updates.
FTSE falls but Rolls-Royce soars
The FTSE 100 started Thursday on the backfoot as a number of index heavyweights went ex-dividend and after the latest FOMC minutes signalled the Fed remains steadfast in its determination to reduce inflation in the US.
At 8.15am London's lead index was down 20.80 points, or 0.26%, at 7,909.83 but the broader FTSE 250 advanced to 19,760.20, up 79.91 points, or 0.41%.
AstraZeneca, Barclays, Endeavour Mining, GSK, Land Securities , Standard Chartered , Unilever have all gone ex-dividends which is estimated to reduce the blue chip index by around 20.62 points.
"They confirmed that the Federal Reserve officials are indeed not lying when they say that they will continue hiking the interest rates to tame inflation toward the 2% mark," said Swissquote Bank's Ipek Ozkardeskaya of the latest Federal Open Market Committee minutes.
Although the 25 basis point rate hike was agreed upon, the minutes showed a "few" members of the Federal Open Market Committee said they wanted a half-point, or 50-basis-point, hike that would show even greater resolve to get inflation down.
Back in London and investors were also digesting results from some leading names in UK business.
Shares in Rolls-Royce powered ahead by 12.4% as the engineer reported strong growth in revenue and profits and predicted further advances in 2023 as the recovery in international travel continues.
The FTSE 100-listed firm reported underlying revenue of £12.69bn in the 12 months to 31 December 2022, up from £10.95bn in 2021, while underlying operating profit increased to £652mln compared to £414mln a year ago.
Looking ahead, Rolls-Royce forecast operating profit between £0.8bn to £1bn in 2023 with free cash flow of £0.6bn to £0.8bn. The firm has also embarked on a transformation programme and strategic review.
Chief executive Tufan Erginbilgic said, “Our transformation programme is already underway and is moving at pace. It will include a strategic review so that we can prioritise our investment towards the most profitable opportunities.”
“We will report the findings together with our medium-term goals in the second half of this year."
Joshua Warner, City Index analyst said the company “blew past” estimates.
“The early results from the turnaround plan and honest language from Erginbilgic should give Rolls Royce investors confidence that this will be a significant shake-up of the 117-year-old company, which has limped from one restructuring to the next over recent decades.”
But BAE Systems PLC slipped back despite reporting sales in the year to December 31 grew 4.4% to £23.3bn and underlying earnings per share were up 9.5% at 55.5p. BAE lifted its dividend per share by 7.6% to 27p.
The defence firm said the order intake rose to £37.1bn in 2022 from £21.5bn a year earlier, while the order backlog increased to £58.9bn from £44bn.
Shares were 1.7% lower in early exchanges.
But shares in John Wood Group PLC soared 31% to 202p after the company said after the market close Wednesday that it had rebuffed bid approaches from Apollo Global Management.
The FTSE-250 company said that it had turned down all unsolicited proposals from the US firm, with the most recent approach in late January valuing it at £1.59bn. The cash offer for all of its shares was worth 230p each.
The company said: “The board carefully considered each of the proposals, together with its financial advisers, and has engaged on a limited basis with Apollo. The board unanimously rejected each of the proposals, having concluded that they each significantly undervalued the repositioned group’s prospects.”
BAE Systems sales grow, order book strong
BAE Systems PLC is another FTSE 100 heavyweight reporting results today.
Sales in the year to December 31 grew 4.4% to £23.3bn and underlying earnings per share were up 9.5% at 55.5p. BAE lifted its dividend per share by 7.6% to 27p.
The defence firm said the order intake rose to £37.1bn in 2022 from £21.5bn a year earlier, while the order backlog increased to £58.9bn from £44bn.
Chief Executive Charles Woodburn said: "Our record orders and financial performance give us confidence in delivering long-term growth and to continue investing in new technologies, facilities and thousands of highly skilled jobs, whilst increasing shareholder returns."
In 2023 it expects sales growth of between 3% to 5%, a rise underlying EBIT of between 4% to 6% and EPS to advance between 5% to 7%.
John Wood rejects bid approaches
The Aberdeen-based energy services and consulting firm John Wood Group will be an early focus after it said it had rejected three takeover approaches from Apollo Global Management.
The FTSE-250 company said in a stock market filing after the market close Wednesday that it had rebuffed all unsolicited proposals from the US firm, with the most recent approach in late January valuing it at £1.59bn. The cash offer for all of its shares was worth 230p each.
The company said: “The board carefully considered each of the proposals, together with its financial advisers, and has engaged on a limited basis with Apollo. The board unanimously rejected each of the proposals, having concluded that they each significantly undervalued the repositioned group’s prospects.”
Shares in the company closed at 148.12p on Wednesday.
Profits power ahead at Rolls-Royce
Rolls Royce Holdings PLC powered ahead in 2022 with strong growth in revenue and profits and predicted more growth in 2023 as the recovery in international travel continues.
The FTSE 100-listed firm reported underlying Revenue of £12.69bn in the 12 months to December 31, up from £10.95bn in 2021, while underlying operating profit increased to £652mln compared to £414mln a year ago.
Operating margin improved to 5.1% from 3.8%, earnings per share rose to 1.95p against 0.11p while pre-tax profits also advanced to £206mln from £36mln.
The engineer said revenues rose as demand rebounded with large engine flying hours in Civil Aerospace up 35% year on year as recovery in international travel continued.
Operating profit was driven by higher profits in Civil Aerospace and Power Systems, partly offset by lower profit in Defence and increased investment in new markets.
The higher margin versus the prior year was driven by improvements in long-term service agreement contract margins and increased spare engines profit in Civil Aerospace.
Free cash flow from continuing operations improved from an outflow of £1.5bn in 2021 to an inflow of £0.5bn in 2022, driven by 35% growth in large engine flying hours, comparatively lower growth in large engine major shop visits at 19%, and higher Defence cash flow.
The improved cash flow position helped drive a hefty reduction in net debt from £5.2bn to £3.3bn, also aided by disposals.
Looking ahead and Rolls-Royce forecast operating profit between £0.8bn to £1bn in 2023 with free cash flow of £0.6bn to £0.8bn. The guidance assumes £100mln to £200mln of targeted contract improvements and large engine flying hours at 80-90% of 2019's level and 1,200-1,300 total shop visits.
The firm has also embarked on a transformation programme and strategic review.
Chief Executive Tufan Erginbilgic said, “Our transformation programme is already underway and is moving at pace. It will include a strategic review so that we can prioritise our investment towards the most profitable opportunities. We will report the findings together with our medium-term goals in the second half of this year."
No dividend was paid.
Ex-divs to weigh on Footsie
FTSE 100 is expected to extend yesterday’s losses at the open after the minutes from the Federal Open Market Committee meeting signalled no let up in the Fed’s push to tame inflation suggesting more rate rises are to come.
A number of index heavyweights, including AstraZeneca, Barclays, Endeavour Mining, GSK, Land Securities, Standard Chartered, Unilever go ex-dividendswhich will also weigh on the Footise reducing the FTSE 100 by 20.62 points.
Spread betting companies are calling London’s lead index down by around 12 points.
Ipek Ozkardeskaya senior analyst at Swissquote Bank described the minutes as “hawkish.”
“They confirmed that the Federal Reserve (Fed) officials are indeed not lying when they say that they will continue hiking the interest rates to tame inflation toward the 2% mark.”
“And the minutes show that they reckon it will take ‘some time’. “
“How much time? We don’t know. Even they don’t know. But we know that the job is not done yet, and the next meeting’s 25bp increase won’t be the last one. “
“We also know that most officials remain favourable for small increases – for longer. But some think that a 50bp hike would be appropriate. The odds for a 50bp hike for the March FOMC meeting now climbed to 24%.”
US markets ended mixed with the Dow was down 85 points, or 0.3%, to 33,045, the Nasdaq Composite gained 15 points, 0.1%, to 11,507 and the S&P 500 lost 6 points at 3,991.
Inflation remained “well above” the Fed’s 2% target, according to the minutes, even amid signs that inflation is declining.
“Inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases but stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path," the minutes said.
Meanwhile, the labor market remains “very tight, contributing to continuing upward pressures on wages and prices.”
Back in London and a busy day of results sees BAE Systems, Drax, Rolls-Royce, Serco and Anglo American among those reporting numbers.