The Week Ahead: M&S is bright, Smith dull and Eurotunnel's going nowhere

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The Independent Online

It's the short week before Easter, and all is quiet, or nearly. The City will have just a trickle of earnings on which to fixate, which may lend more time for institutions to take a second look at their positions and engage in some profit-taking from a market that continues to be buoyant. Some say too buoyant.

The FTSE 100 closed another week over 6,000 and is infused by a level of optimism about corporate profitability that hasn't been seen for two decades. According to research from Morgan Stanley, around 70 per cent of analysts are predicting an increase in operating margins at UK companies this year. The last time that the market had so sunny an outlook on profits was 1986.

Morgan Stanley, however, thinks such expectations are set too high, and that we are in for a large crop of earnings disappointments and, consequently, higher unemployment. Further, the frenzied bidding from private equity firms and strategic buyers that has done much to puff up the markets is more often than not coming to nought. As bids fail, institutions may get more aggressive about cashing in on share price jumps, before values settle back to where they were before companies became targets.

One company not likely to feature in this activity is Eurotunnel. Few shareholders know suffering like those unfortunate enough to hold stock in the operator of the Channel Tunnel. And when it unveils its annual results Wednesday, they can expect little reprieve. Indeed, the company's shares continue to bump along near their all-time low of just 25p per share.

Its chief executive, Jacques Guonon, could inform shareholders that he has persuaded the company's senior creditors to sign up for the memorandum of understanding agreed in January by debt holders representing more than 50 per cent of the group's borrowings. But they would be forgiven for not holding their breath.

"We should see something, but I don't expect a solution yet," said Michael Cox, a credit analyst at Royal Bank of Scotland. Since January, Mr Guonon has been working against a two- month extension he secured to convince junior creditors to sign up to the memorandum as well. That extension, however, expired at the end of last month with not a peep from the company. Another extension may be on the cards, Mr Cox said.

The shareholder agreements, details of which the company has not revealed, could lead to a debt-for-equity swap that would wipe out current investors. Eurotunnel's debt stands at £6.3bn, and from next year it will have to start making its repayments in full, rather than the partial payments it has been making under a previous agreement.

Marks & Spencer, by contrast, is a company clearly on the way up. In its Tuesday trading update, analysts are expecting the retailer to report a surge in both like-for-like sales and gross margins. Shore Capital upgraded M&S to a "buy" on the back of third-quarter numbers that showed sales increasing by 0.8 per cent even as overall consumer spending remained weak. The company should also report better figures on food sales and continued progress at its refurbished sites.

Bookseller WH Smith is set to reveal a pedestrian set of interim results on Wednesday. Freddie George of Williams de Broë expects the company to report £71m in pre-tax profits, up ever so slightly from the same time last year when it brought in £70m. "The two things we'll be looking at are like-for-like sales and what's happened to margins," Mr George said. He predicts a 3 per cent drop in the former, but a 1.8 per cent increase in margins due to a drop in mark- downs and an improved mix of products on the sales floors.

Longer term, however, the company will have to come up with a plan to reassure analysts fretting over its future growth. "WH Smith is a mature business," Mr George said. "What is it going to do in terms of strategy or an acquisition to kickstart its earnings?"

BAA is dealing with its own takeover tribulations. The British airport operator will be keen to keep the focus on its traffic numbers for March when they are revealed on Tuesday, but the numbers will surely be viewed through the prism of the bid for the company from Ferrovial. The Spanish group, along with Canada's Caisse de Dépôt du Québec and GIC Special Investments of Singapore, went hostile with its £8.75bn offer for BAA last week. The target has rejected the advance, preferring to go it alone. But as the very public battle rages on, keeping its numbers up, and thus its defence strong, will be vital.

Severfield-Rowen, the steel group which is helping in the expansion of the BAA-operated Heathrow, is expected to deliver annual results that back up a trading statement last year predicting it would come in well ahead of analyst estimates.

Suit sellers Moss Bros and Austin Reed will also be gracing the week, with the smaller Austin Reed reporting earnings on Wednesday, to be followed the next day by its rival.