The week ahead

Oct 10 2008 By Graeme King

Inflation data and mortgage arrears figures from Northern Rock will give investors more than just stock market turmoil to cope with next week.

Nationalised mortgage lender Northern Rock reports its latest trading figures on Tuesday against the backdrop of a steadily worsening housing market.

During the first half of 2008 - when the Gosforth bank was taken into public ownership - it racked up losses of £585.4m.

Its bad debt provisions stood at £351.8m as 1.18% of its mortgage book slipped to more than three months in arrears at the end of June - more than double the end of 2007.

These arrears are set to rise further as the housing slowdown deepens and higher-quality borrowers desert to other lenders - hitting the standard of its loan book.

But its savings business - in which all deposits are guaranteed by the Government - has proved so popular in the current banking crisis that the Rock was last week forced to withdraw some of its products.

The move is to ensure that it does not have an unfair advantage from state ownership and take in more than 1.5% of the country’s savings balances.

There was more cheer for the taxpayer this week when Chancellor Alistair Darling said the lender had paid back more than half of the £26.9bn it borrowed from the Bank of England when the credit crunch struck it down last year.

But Treasury officials have also added £3bn of extra share capital to help it cope with increased housing market uncertainty.

Around 1,300 staff made redundant under executive chairman Ron Sandler’s turnaround plan to shrink the business left the company in August.

Bellway’s full-year figures next week will bring a dismal season of results and updates to a conclusion.

In August, the Newcastle-based builder reported a 45% plunge in transaction levels in the six months to July 31 and said efforts to drum up demand were likely to see full-year operating margins drop by up to 3%.

Cancellation rates soared to ``unprecedented levels“ in the summer months, with trading failing to improve since its year-end in July, the firm said.

Consensus forecasts suggest a 31% fall in profits to around £161.3 million for the year to July 31, and a further tumble in earnings during the current year.

But some analysts say the the firm could escape the worst of the carnage wreaked on other builders by the tumbling property market.

Panmure Gordon’s Rachael Waring is looking for a ``degree of outperformance“ from the company due to the relative strength of its balance sheet while other players have scrambled to renegotiate banking covenants and refinance their debt.

``Gearing remained relatively low and the company was operating well within its banking facilities (at its last update). Relative to most companies, this was a solid performance,” she added.

Nonetheless Bellway is still expected to write off £180 million from land values in the next three years. It has also cut 150 staff as it merged offices and closed four sites in Scotland, the South West, Midlands and Thames Gateway.

Rate-setters at the Bank of England will hope that Tuesday’s inflation figures mark the peak in the spiralling cost of living seen this year.

Inflation was driven upwards to 4.7% in August by rising oil, food and energy prices to stand at more than double the Bank’s official 2% target.

The current run higher has seen Bank Governor Mervyn King write two explanatory letters to the Chancellor and kept interest rates on hold at 5% since April - at least until Wednesday’s dramatic half-point cut following a month of financial turmoil.

Although most economists expect inflation to peak at 5% in September - mainly due to the gas and electricity hikes from four energy companies - recession fears are now pre-eminent on the Bank’s Monetary Policy Committee.

The MPC said on Wednesday that inflation risks had shifted ``decisively“ to the downside - meaning it is now in danger of undershooting its target as prices fall in a recession.

Alongside rising energy bills, Investec’s Philip Shaw said there was ``a big question mark“ over whether declines in world wholesale food would find their way to the high street, while petrol prices probably fell only marginally over the month.

He said: ``Overall we are forecasting CPI inflation rising to 5.2% from 4.7%, which we expect to be the peak.

``Inflation should fall quickly through next year and we are forecasting the targeted measure down at 1.6% by the fourth quarter of 2009, over 1% lower than the MPC’s current central view.”

Premier Inn parent Whitbread has proved resilient during the slowdown, and the City expects this trend to continue when the group reports interims on Tuesday.

Last month Whitbread’s budget hotel chain posted a very healthy 10.2% hike in like-for-like sales in the 24 weeks to August 14 as corporate customers turned to cheaper lodgings to save cash.

Business travellers now account for 60% of the chain’s revenues, the company said.

Sales at the hotel business slowed since a first quarter rise of 10.7%, but Whitbread said its efforts to introduce lower price food at its restaurant arm saw comparable sales rise by 4.4%, up from 3.6% in the first three months.

A slight blackpost was at the firm’s Costa coffee operation, which saw a slowdown in like-for-like sales growth to 3.7% against 6% in the first quarter.

Whitbread moved to reassure that the fall in growth came against tough comparatives last summer, when the June and July floods saw coffee sales soar.

The group said it remained ``vigilant“ of the economic troubles facing the UK. ``We are well aware that times are tough and are keeping our eyes open,” it added.

Analysts are expecting underlying pre-tax profits of £119 million for the six months to September 30. Last year the figure was £99.4 million.

Mathew Gerard at Investec Securities said: ``We expect management to deliver another upbeat assessment of the prospects for Premier Inn.”

He added: ``The macroeconomic outlook for UK two and three star hotels remains positive.”

Whitbread launched a plan in February to save £25 million, including by targeting ``operational efficiencies“ such as labour costs, merging the management of its hotel and pub restaurant and businesses, as well as outsourcing its logistics systems.

Luxury fashion group Burberry has been shrugging off the troubles hitting the wider sector in recent months and an update on Tuesday will show whether it has kept up the pace of growth.

The firm, which is famous for its trademark check design, has been largely shielded from the consumer spending slump, with its target market showing no sign of belt tightening.

Demand for luxury goods has been increasing as the soaring cost of crude has made those in oil-rich nations even wealthier. Its set of results for the year to the end of March showed an 8% rise in like-for-like sales, with wholesale revenues doubling in areas such as China, the Middle East and Russia.

It seemed the trend continued in the new financial year, given the 26% rise in first quarter sales revealed in July. Burberry confirmed that growth remained ``very strong“ in oil-rich markets, while the group also received a boost from strong wholesale trade for its early winter/autumn collections.

Trends in the retail sector are showing that there is a growing divide between retailers targeting the high-end and low-end of their markets. Those aimed at the middle ground are fairing the worst, while retailers in luxury and top-end sectors have weathered the storm well, which bodes well for Burberry’s prospects.