Shares: Week Ahead: EMI shareholders looking for a little spice are likely to be disappointed

Cathy Newman
Sunday 23 October 2011 07:38

The Spice Girls may have only just lost their shine, but EMI, their record company, has been under the weather for quite some time. During the past year, the group has been underperforming the sector by around 20 per cent while it has been lagging behind the All Share Index by as much as 40 per cent.

The group reports interim results tomorrow and the news is not expected to be good. Analysts' pre-tax profits forecasts range from pounds 70m to pounds 73m, compared with pounds 112.5m last year.

There are several reasons for the shortfall. The strength of sterling is one of the biggest problems faced by EMI. And to make things worse, the turbulence in the Asian market is likely to hit the group's sales in the Far East. EMI has been slow to reassure on this point, analysts say, and City folk are consequently fearing the worst.

Although currency and economic factors are beyond EMI's direct control, observers point out that some problems have been of the company's own making. For example, a few institutional investors have been disturbed that Ken Berry, president of EMI Record Music, appointed his wife as a top dog at EMI's Virgin Records business in the States at the end of September.

Another worry is that EMI is indicating profits from several, unspecified, new releases will not be included in the interims as some release dates have been put back from the third to the fourth quarter. Analysts are troubled that the promised array of fabulous new releases has not materialised.

The final cause for concern is disappointing sales from singers such as Janet Jackson. The Spice Girls' latest work, Spiceworld, has reportedly not been a great success, although, as the album was not released until after the end of the half year, the effects of lower sales will not be felt until the next batch of results. Bad sentiment about the Spice Girls' future has undoubtedly damaged EMI's share price and will continue to do so while rumours of friction between the band members do the rounds.

There are glimmers of hope for EMI, though. Trade in continental Europe is starting to pick up while the music publishing arm is showing good growth. In addition, some would say the picture is not as dismal as it might be as EMI was over-rated before it split from Thorn, the rentals group, in August last year.

Thorn also reports interims on Tuesday and is set to prove even more depressing for shareholders than EMI. Profits before tax and exceptional items are likely to fall in the region of pounds 47.5m to pounds 60m, against pounds 79.3m the year before. Analysts are finding it hard to look on the bright side, especially as legal problems in America rumble on. Thorn is accused of charging customers inflated interest rates and there are seven outstanding cases in five different states. The legal costs could prove extremely damaging, say analysts.

The impact of the increase in insurance premium tax (IPT) is another thorn in the company's side. IPT was raised from 2.5 per cent to 17.5 per cent in January. Thorn has had to put up UK rental prices by 6 per cent as a result, which has further eroded the advantages of renting over buying.

The recent disposal of Fona, the Danish retail chain, for pounds 76m is expected to artificially inflate profits, as analysts say the transaction has been backdated so it can be included in the interims.

Utilities are the other big feature on the reporting landscape this week. Severn Trent is one of the first off the block tomorrow, and as a result the stock was in demand at the end of last week. Analysts are looking for interim pre-tax profits of between pounds 187m and197m, compared to pounds 202m a year ago. The City is hoping Severn may provide news of acquisitions or a share buyback to improve the efficiency of its balance sheet. Severn has been criticised for its failure to act decisively over expansion, but it has received praise from the regulator for its progress on reducing leakages.

Also reporting interims tomorrow is National Grid. The market expects pre-tax profits to come in at between pounds 224m and pounds 234m, down from pounds 292.7m last year. NatWest Markets, the house broker, says the spotlight will be turned on Energis, which is due to float.

But what the market is really holding its breath for is news of the strategic review at United Utilities. The chief executive, Derek Green, who was appointed after Brian Staples' sensational exit in July, is likely to tell shareholders of cost-cutting plans. Sir Desmond Pitcher, the outgoing chairman, may also have something to say in his valedictory set of results.

Analysts anticipate interim pre-tax profits in the region of pounds 230m to pounds 240m, up from pounds 224m last year.

Tate & Lyle reports full-year results on Wednesday. Pre-tax profit forecasts range from pounds 138m to pounds 150m, compared to pounds 276.3m the year before. Sterling has hit the company hard.

The next day, Wolverhampton & Dudley, the UK's biggest regional brewer, announces figures for the year to September. Analysts are expecting flat pre-tax profits of around pounds 43m.

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