Must read: Marks & Spencer, BT, easyJet, UK inflation

Marks & Spencer full-year – Wednesday 20 May

Richard Hunter, Head of Markets, interactive investor says, “Marks & Spencer Group will be glad to see the end of a year where the cyber disruption was the unfortunate highlight. Even so, the group’s healthy financial position helped it to weather the storm, and indeed M&S continued to make investments in the business despite the cyber-related costs elsewhere.

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Meanwhile, there is little doubting the ongoing resilience and strength of the Food business, which accounts for 54% of group revenues. M&S announced at its third quarter update in January that sales increased by 6.6% to £2.72 billion in the quarter, reaching a new milestone market share for the group, and where innovation and quality upgrades continue to propel performance. In addition, prospects remain bright for the unit, which is a clear focus of the group’s push for growth in terms of new stores and general investment. Quite apart from the enduring appeal of its specialist food ranges, the nature of these revamped stores has led to a noticeable increase in customers choosing M&S for their full shop.

The performance of Fashion, Home and Beauty undermined some of the overall progress, with sales dipping by 2.5% to £1.28 billion in the third quarter since the unit was at the heart of the disruption. The digital part of the business is still in recovery mode, while reduced high street footfall was a headwind. More positively, the group noted that its new season sales were showing some strong signs of resonating with shoppers, playing into its new target market of the “modern mainstream customer” as the company attempts to throw off the shackles of a previously dowdy and tired image.

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There are also increasing signs of life at Ocado Retail, where M&S sales on its website grew by 16.3% and accounted for 30% of total Ocado Group sales. Even so, the unit remains loss-making and is therefore something of a drag. With overall full-year underlying pre-tax profits of £650 million expected, there may be an opportunity to pleasantly surprise investors. This could arrest a decline which has seen the shares fall by 13% over the last year, although through a longer-term prism a rise of 84% over the last three years is a trend which M&S will wish to re-establish.”

BT full-year – Thursday 21 May

Richard Hunter says, “Just over two years into her tenure, the CEO’s transformation plans to cut costs, boost efficiency and provide more focus have been at the centre of BT Group’s recent fortunes. By the same token, changing horses midstream is never an easy task, and the telecoms sector is a tough place to be in normal circumstances, let alone when a group is in the midst of a turnaround as competitors continue to flourish.

The Openreach division has been doing much of the heavy lifting in the meantime and is seen by many as being a future potential jewel in the crown. Following several record build rates of over a million FTTP (fibre to the premises) connections, Openreach has now reached 21.4 million premises, over half of those in the UK. It also leaves the plan of increasing the number to 25 million in total by December 2026 well on track.

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Perhaps equally importantly is the fact that peak capital expenditure on this roll-out has passed, which is an important inflection point. Indeed, all things being equal this should free up substantial amounts of capital in due course which, given the group’s strong levels of cash generation, can be steered towards what is still an uncomfortably high level of net debt and a pension deficit which has been something of an albatross around the neck for some considerable time. BT estimates that this year’s expected £1.5 billion of cash flow will grow to £2 billion by 2027 and to £3 billion by the end of the decade.

This could also free up some capital for a strong increase in the dividend, where the current yield of 3.5% is of some attraction. It will be increasingly difficult for BT to positively surprise investors, but in the meantime it has been successful, with a share price rise of 31% in the year to date, 45% over the 12 months and of 130% over the last two years.”

easyJet half-year – Thursday 21 May

Richard Hunter says, “These are turbulent times at easyJet. On top of the issues which have blighted the sector over recent years, ranging from industrial action, volcanic ash clouds, geopolitical tensions to virus outbreaks, the Middle Eastern conflict has added to the difficulties. At the latest update in April, the group said it faced £25 million in extra fuel costs and £30 million of legal provisions, and forecast a half-year loss of between £540 million and £560 million, far worse than the £420 million which the market had been expecting. In addition, the rest of the year could be affected by weaker demand, reducing the airline’s ability to offset some of the costs by increasing air fare prices.

This has proved a meaningful headwind to its otherwise pleasing progress. The group has expanded both its fleet as well as the number of destinations, closing underperforming bases with the switch of aircraft to more profitable airports already paying dividends.

In addition, the benefit of increasing ancillary revenues, which include the likes of customer payments for personally allocated seats, baggage and food, were in evidence, Now accounting for 26% of group revenue, customers are clearly still readily prepared to pay for these extras, while also adding another string to the group’s revenue bow.

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The easyJet holidays arm has been the recent star of the show. This is a burgeoning business which seems to have come at the right time with cost-conscious consumers searching for value packages. The group has high hopes for the unit’s longer-term contribution to overall profits, which currently accounts for 14% of total group revenue. easyJet previously hit its medium-term target early, resulting in a new target being set of £450 million of pre-tax profit by 2030.

However, the group is up against an extremely volatile backdrop which has seen the group flying into and out of the FTSE100 on several occasions over recent years, with the most recent move being relegation to the FTSE250 in March. The shares have fallen by around 35% in the last year and although easyJet continues to target £1 billion of pre-tax profit in the medium-term, this will not be a clear run. Indeed, and in comparison, a 26% increase in the share price of British Airways owner International Consolidated Airlines Group SA over the last year underlines where investors’ priorities have tended to focus.”

UK inflation – Wednesday 20 May

Victoria Scholar, Head of Investment, interactive investor, “On Wednesday, the UK headline rate of inflation is expected to fall back to 3% in April from 3.3% in March.

However, this should not be taken as a fundamental sign that the inflationary impulse from the Iran war is fading. In fact it highlights the perils of looking at a single inflation print in isolation. The anticipated retreat is a consequence of the April Ofgem energy price cap (which was decided pre the Iran war) resetting lower. This will go some way towards helping offset higher petrol, airline and other prices impacted by the elevated global oil price backdrop with brent crude trading at around $120 per barrel on average in April. When the Ofgem energy price cap resets in July, UK households will be faced with a sharp increase in energy bills.

Were it not for the Iran war, it would be about this time that the UK inflation rate was finally expected to fall back to the Bank of England’s 2% target. Instead, interest rate and inflation expectations have drastically rerated higher. While money markets this week have been pricing in multiple rate hikes by December, we believe the market is getting ahead of itself and there will be less hikes than currently priced in. While one rate of increase this year could be on the cards, the market doesn’t seem to be adequately reflecting the UK’s growing recession risk and the weak labour market which temper the need for tighter monetary policy.”