Wednesday preview: EasyJet, RPC, UK inflation reading to clear up doubts?

Both budget airline easyJet and plastics maker RPC Group have the opportunity to set the record straight with investors as they provide trading updates on Wednesday, while UK inflation data could give a strong clue as what the Bank of England will do with its next interest rates decision.

As easyJet has already reported its monthly capacity and passenger growth since May's half-year results, investors already know that third-quarter capacity increased 2.5% on the prior year but 3% lower than planned due to increased disruption, while passengers numbers grew 3.6%.

This, noted broker Numis, is significantly below guidance of circa 5% capacity growth in the second half and requires the budget airline to increase capacity around 7.5% in the fourth quarter to meet current guidance, analysts expect management to reduce capacity growth guidance for around 100 basis points for the half.

Management has hitherto guided for slightly positive growth in revenue per seat in the half, with unit costs excluding-fuel guided to rise by roughly 2% at constant currency rates for the full year, implying 2.6% in the second half.

"However, given the continuation of material disruption in 3Q18 (2,537 cancellations reported in May and June versus 788 in the prior year), there is likely to be upwards pressure to unit cost guidance," Numis said. "Whilst we expect a weak set of results and potential pressure on FY18 guidance, the EZJ share price has at least in part began to reflect, with the share price c. -12% since the end of June."

UBS was more confident, seeing revenue per seat up 6.6% and forecasting Q3 revenues of £1.48bn vs £1.39bn. "We see upside risk to guidance on the back of an improved summer pricing outlook."

Analysts at Exane BNP Paribas also recently upgraded its stance on the budget airline saying: "We think that the market is continuing to underestimate the likely positive impact of the shift in the group's operating capacity in Europe near-term, while we are increasingly convinced that the higher guided unit costs will be repaid longer-term in improved profit per seat."

Shares in RPC Group had, until recently, lost more than a third of value since October, with June's final results disappointing investors despite a successful year of cash generation and further dividends. Total revenues grew 33% in the year to 31 March at constant currencies, mostly via acquisitions, as organic sales were up just 2.8%.

Analysts at Northern Trust have criticised the company's acquisitive strategy as a "rights-issue funded, value destroying roll-up story", saying that the results showed low free cash flow and organic growth "not flowing through into profits", raising further questions about underlying growth. But RPC, led by chief executive Pim Vervaat, stressed that the company was "strategically strong" and had the "financial strength to exploit unprecedented market opportunities", highlighting a focus on developing environmentally-responsible plastic products.

Shares have rebounded a little since falling to near a two-and-a-half year low late last month. JP Morgan, for instance, highlighted "significant upside" at the recent share price, with its 'overweight' rating also boosted by a 2% upgrade to earnings per share estimates for 2019 and 2020 by 2% to reflect a recent acquisition and share buybacks, offset by higher financing costs.

Coming not long after final results, Numis analysts expect the first quarter trading statement to be "qualitative, rather than quantitative", with little financial detail disclosed. "Key commentary, in our view, will be management update on the group trading performance since the end of fiscal 2018, and how the group has traded relative to expectations."

They added: "Given the reduced impact of acquisitions on the financial performance in this financial year, the principal drivers of the revenue performance during the period will comprise organic growth, the polymer price environment and FX translation year-to-date. Strategically, management may take this opportunity to update on any progress in the disposal of non-core businesses that have previously been identified."

Severn Trent will provide an update not long after it and peers Thames Water, Southern Water and South East Water came in for criticism from water watchdog Ofwat for performing “badly” and causing “significant hardship” for customers during the Beast from the East big freeze, which left tens of thousands of people without water for several days.

The report cites poor preparation and planning, limited or inaccurate data, a failure to identify vulnerable customers and poor communication.

Close Brothers are due to put out a pre-close update

Broker Peel Hunt sees little reason for any change in the overall direction and continue to expect Close to deliver a solid result for the year. "Conditions for the bank are likely to be little changed, while the Asset Management business should see an increase in AuM given higher market levels."

MACROECONOMIC DATA

UK inflation data on Wednesday is one of the last pieces of the puzzle for the Bank of England, made more complex after pay growth was shown a day earlier to have slowed to its weakest in six months despite record employment.

The consumer price index is expected to have risen 2.6% in June compared to the year before, up from a 2.4% rate of CPI in May, though month-on-month CPI growth is seen slowing to 0.2% from 0.4%.

Core CPI, which excludes fuel and food, is forecast to increase to an annual rate of 2.2% from 2.1%.

HSBC economists were in line with the average estimate for headline CPI, which they said was entirely a result of price increases by the Big 6 utility companies, plus a little more pass-through from recent oil price rises to the petrol pump.

"But we expect the core CPI rate to edge down by 0.1ppt, to 2.0% y-o-y. That is because we think the inflationary impact of the 2016 sterling depreciation will continue to wane. Meanwhile, underlying domestically-generated inflation remains muted, in our view."

This was by no means the universal view, with Pantheon Macroeconomics and RBC Capital Markets predicting CPI inflation will have risen to 2.7%, with BRC data suggesting core goods inflation also rose.

Official UK house price data will also be published along with CPI, RPI and PPI at 0930 BST. More timely indicators suggest that the official measure of year-over-year growth in house prices slowed to 3.8% in May from 3.9% in April.

Confirmation of EU inflation data is due at 1000 BST, with the preliminary release having indicated eurozone headline inflation picked up further to 2.0% in June, from 1.9% in May.

HSBC noted that the headline inflation rate remains at ECB’s target of "below, but close to, 2%", albeit temporarily fuelled by higher energy prices, with core inflation falling back to 1.0% in the preliminary release, from 1.1% in May, pointing to a lack of the "convincing upward trend" hoped for by the ECB.

Wednesday July 18

INTERNATIONAL ECONOMIC ANNOUNCEMENTS

Building Permits (US) (13:30)
Consumer Price Index (EU) (10:00)
Crude Oil Inventories (US) (15:30)
Housing Starts (US) (13:30)
MBA Mortgage Applications (US) (12:00)

UK ECONOMIC ANNOUNCEMENTS

Consumer Price Index (09:30)
Producer Price Index (09:30)
Retail Price Index (09:30)

TRADING ANNOUNCEMENTS

Alliance Pharma, Carr's Group, Close Brothers Group, Connect Group, easyJet, GVC Holdings, Hochschild Mining, NewRiver REIT, Premier Foods, RPC Group, Severn Trent

EGMS

Stobart Group Ltd.

AGMS

Ashmore Global Opportunities Limited GBP , B.P. Marsh & Partners, Biffa, Bloomsbury Publishing, BTG, BTG, Experian, Montanaro UK Smaller Companies Inv Trust, Polarean Imaging, Premier Foods, Renold, Renold, RPC Group, Severn Trent, Summit Germany Limited, TalkTalk Telecom Group

FINAL DIVIDEND PAYMENT DATE

JPMorgan Euro Small Co. Trust

QUARTERLY PAYMENT DATE

Assura