Must read weekly preview: Hays, Bellway, Whitbread, US earnings season, UK GDP

Hays Q1 – Monday 12 October

Richard Hunter, Head of Markets, interactive investor says, “The recruitment firm's full-year numbers contained some positives within a tough trading environment, which is highly unlikely to have changed. A pre-tax loss of £54.5 million compared with a profit of £1.5 million a year earlier is explained by exceptional costs including restructuring of £89.6 million, with Hays (LSE:HAS) divesting 13 businesses to focus on the remaining 16 potentially higher performance lines.

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Excluding the restructuring, at an operating level profits rose by 7% to £48.6 million, with cost savings of £50 million over the period which should be repeated this year. Germany generated most operating profit at £41.2 million, while tech jobs generated most net fees at 26%, followed by accountancy and finance at 15%, with the majority of both coming from temporary hires.

Hays is aware of the challenges, not least of which are tough economic conditions which have hindered decision-making in hiring due to lower confidence and tighter budgets from companies. And there's the much-vaunted impact of the AI revolution on jobs which remains on the radar as a slow-burner. In addition, a recent dividend cut leaves the yield at a paltry 0.7% (previously over 4%) while the valuation of the shares does not look obviously cheap.

In response, the group is streamlining its strategy including a more focused geographical footprint as well as looking to recruit for more specialised positions which are expected to be less impacted by AI. Indeed, Hays’ own investment in AI could improve its productivity and profitability in due course. Although the shares remain down by 57% over the last five years, the group’s more recent moves have led to a rise of 15% in the year to date, reflecting the group’s efforts and investors will be keen to hear whether the momentum is being maintained despite the tough backdrop.”

Bellway FY – Tuesday 13 October

Richard says, “The trading statement in August foreshadowed some of what investors can expect, whereby revenues are likely to have grown by 13% to £3.14 billion, with underlying operating profit of £320 million at the lower end of the guided range, but up from £303.5 million the previous year.

Housing completions should have increased by 10% to 9,695, ahead of the previously estimated range of 9,300 and 9,500 homes. Less positively, the group previously reduced estimates for adjusted operating margin, downgrading from 11% to 10.5% due to a combination of sales incentives and building cost inflation, and this may reduce further to 10% for the year.

However, the results will be equally interesting to investors in hearing Bellway (LSE:BWY)’s thoughts on current trading, the medium-term outlook and its own self-help initiatives. The group may reiterate that it has contracted to purchase a further 8,578 plots at a cost of £505 million, with its acquisition policy remaining highly selective and in those areas where underlying demand is most in evidence. There could also be additional solace from a forward order book which contained 4,206 homes at the last count, albeit lower than 5,307 in the corresponding period, with a combined value of £1.2 billion (£1.52 billion).

To maintain cash generation and asset turnover, the group is looking to unlock some of the value from its strategic land bank. This follows the vital Spring selling season which started brightly, but where customer demand then waned in the face of rising mortgage rates, as evidenced by a decline of 5.8% in private reservation rates for latest quarter.  

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The careful financial management of its assets leaves Bellway in decent shape. The existing £150 million share buyback programme is nearing completion and will be followed up with a further tranche of £50 million. Meanwhile, a hike to the dividend in March led to a respectable yield of 3.5% which is adequately covered, even if the level of the dividend remains below historic levels given a severe cut to the payment two years ago from 140p to 54p.

Even so, this has been a torrid time for the housebuilding sector and Bellway is no exception. Higher interest rates have joined a list of headwinds, such as consumer sentiment which has been in the doldrums for some time. In addition, there have been increasing calls from the sector for the government to accelerate the proposed relaxation of planning regulations, which is far from taking full effect.

There are also general affordability concerns, particularly for first-time buyers, which need to be addressed to give this cyclical sector an overdue boost. Despite a boost in September from the government announcement that there would be a new scheme to help first-time buyers including a loan of around 20% of the value of the property, the shares remain down by 26% in the year so far which reflects the scale of the challenges ahead in this most cyclical of sectors.”

Whitbread HY – Tuesday 13 October

Richard says, “At the first-quarter update in June, Whitbread (LSE:WTB) noted that sales rose by 2% to £700 million, with both price and occupancy rises resulting in a 3% spike in UK accommodation, as compared to 1.9% in the first eight weeks of the year. For the moment, the Premier Inn UK business continues to do the vast majority of the heavy lifting for the group.

Whitbread more recently introduced measures to fine tune profitability, such as looking at ancillary revenues whereby guests are able to pay extra for the likes of early check-in and late check-out, “Rooms with a view” and parking. Indeed, Premier Inn has become the largest hotel chain in the UK, with a 12% share of total hotel room supply. In relative terms, Premier Inn has consistently outperformed the market since the end of the pandemic and continues to do so.

Premier Inn Germany is also making all the right noises. The business contributed a profit for the first time last year, although growth has been slower than hoped. Even so, Whitbread believes Germany to be an area ripe for the picking and a source of medium-term growth.

Further out, the aims are clear – by 2030, Whitbread expects adjusted pre-tax profit of £70 million emanating from what should then be 20,000 rooms. In the latest quarter, accommodation sales rose by 13%, driven by organic growth and increased capacity.

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Whitbread is a work in progress and in the midst of a five-year transformation plan. In addition to previously announced efforts to integrate its restaurants into Premier Inn, the group has stated that it is looking to reduce investment spend while releasing some capital from its property portfolio estate. Further planned savings of £250 million over the plan should then enable £2 billion of free cash flow by 2031. The strategy seems sound, but execution risk and a five-year timeframe until the benefits wash through are major hurdles which Whitbread will need to overcome.

Of course, the world will not stand still in the meantime and competition remains intense in the hospitality industry. Whitbread expects cost inflation of around 4% this year, even after any offsets, and consumer sentiment is currently shaky which could lessen the propensity to travel around the country. The shares are virtually unchanged this year, but down by 21% over the last 12 months. While an attractive dividend yield of 3.8% may pay some investors to wait, any investment into Whitbread is very much for the long haul.”

US earnings season

Victoria Scholar, Head of Investment, interactive investor says, “US third-quarter earnings season kicks off with Wall Street lenders like The Goldman Sachs Group Inc (NYSE:GS), JPMorgan Chase & Co (NYSE:JPM) and Morgan Stanley (NYSE:MS) taking centre stage.

It comes at an uncertain time for markets and the global economy, with the continued overhang of the Middle East turmoil, the recent surge in bond yields, higher for longer inflation and interest rate backdrop, and questions about the sustainability of AI spending and returns.

Despite this, expectations are high heading into earnings season. This raises the bar for companies looking to top analysts’ forecasts. US equities are upbeat, with the S&P 500 and Nasdaq hitting all-time highs just this week supported by AI enthusiasm and softer jobs data which makes hikes from the Fed less urgent.  

According to FactSet, the S&P 500 is expected to report its third straight quarter of earnings growth above 25% and the eighth straight quarter of double-digit earnings growth. This would represent one of the strongest periods of earnings growth in history.

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After a strong start to the year for the US banks, rising Treasury yields have punished US banking stocks. The KBW Bank Index has suffered a steep slide of around 15% since the highs in August, falling into correction territory. Goldman Sachs and Bank of America Corp (NYSE:BAC) are among the hardest hit.

The bond market sell-off is poised to be a major theme during next week’s earnings calls. On the one hand, fixed income is likely to provide a boosted to Fixed Income, Currencies, and Commodities (FICC) trading revenues thanks to the increase in volatility and trading volumes. There could also be support for net interest income through improved lending margins and the higher interest rate backdrop. On the other hand, higher yields put pressure on the market value of banks’ fixed income portfolios.

Investment banking dealmaking will be another topic front of mind next week. While M&A and IPO activity has been healthy this year, momentum has softened in recent months, the bond market volatility resulting in some high-profile IPO delays including for Oura.

Elsewhere, investors will be listening out for comments from the banks about consumer spending, loan growth and credit quality which could provide clues into the strength of the US economy.”

UK Monthly GDP – Thursday 15 October

Victoria says, “UK monthly GDP figures for August will be released on Thursday. Although the monthly data is notoriously volatile and difficult to predict, recent forward looking survey data, particularly PMIs, have pointed to a robust backdrop for manufacturing and services over the past three months. Therefore, August’s GDP should reveal continued growth over the summer after resilient readings of 0.3% and 0.4% in June and July respectively.

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However, there is a host of headwinds that the UK economy faces going into the final months of the year that could weigh on fourth-quarter growth. Rising energy bills, elevated gilt yields, volatile energy prices and uncertainty ahead of the Autumn Budget are among the economic hurdles ahead, creating a challenging backdrop for both consumers and businesses. Plus, growth has typically been more front loaded, with strength in the first three quarters followed by a loss of momentum in Q4 in recent years. We could see a repetition of that pattern this year.”