RPT-Fitch: EMEA Corporates' Sector Earnings Expectations

Tue Feb 4, 2014 7:25am EST

Feb 4 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings expects EMEA corporates' FY13 financial results to have generally underperformed company guidance and prior year results, driven by challenging market conditions in early 2013, delayed benefits of the fragile developed market recovery and sector-specific factors. We, however, expect some benefits from the developed market recovery to take hold in 2014, translating into improved profitability and cash generation over the next 12 to 18 months.

Fitch expects that 2013 outturns for many oil and gas companies to have been weaker than those in 2012. This is partly driven by weaker average brent prices (down 2.5% yoy), but specific factors - such as the ongoing fallout from unrest in the Middle East and North Africa, continuing problems in Nigeria, a weak refining market, and some bad investments in US shale assets - would have had more of an impact for some players and will produce further pressure into 2014. Both BG Energy Holdings Ltd (BG) and Royal Dutch Shell (Shell) have issued profit warnings - BG announced impairments to assets in the US and Egypt and revised down guidance for production in 2014-15; and Shell highlighted a weak 4Q13 due to a combination of low production, unusually high downtime, high exploration expenses, continued pressure on refining and problems in Nigeria and the US.

In the telecoms sector regulatory and competitive pressures have contributed to a generally cautious 2013 guidance. For most issuers our rating case assumptions are somewhat lower than company guidance but we would expect the telecoms and cable sectors to announce results at the lower end or that are in line with guidance, thus maintaining our current negative rating outlook for the sector. In a few cases (for issuers on a Negative Outlook such as Telecom Italia S.p.A ) peripheral macro factors might have weighed more heavily and results are slightly more difficult to predict. One-off items such as exceptional capex or unforeseen debt-driven M&A negatively affecting results are, however, more unlikely in the current climate. In the media sector the outlook is slightly more positive with a number of rated entities including WPP plc revising up guidance on the back of improving economic fundamentals.

We expect 2013 organic revenue and operating profit growth for fast moving consumer goods (FMCG) multinationals to also have been weaker than in 2012 (average 2%-4% in FY13 versus 4%-6% in 2012), as witnessed in Unilever NV's results on 22 January. A key driver of slowing growth in the sector is weakening momentum in consumer spending in developing markets - a result already visible in recent 9M13 reporting - which was compounded by currency depreciation. Annual results are normally also an opportunity to make announcements with respect to share buybacks. Nestle SA's commitment to continue de-leveraging and recent rating headroom tightening at Anheuser Busch InBev and Philip Morris International should prevent these major industry players from shifting to more shareholder-friendly policies in 2014. Conversely, we believe management at British American Tobacco plc and L'Oreal SA could see some merit in increasing their share buyback activity on the back of robust free cash flow (FCF) generation and limited M&A activity.

Capital goods companies' FY13 performance was marked by profit warnings, as companies were plagued by unexpected project costs and large restructuring expenses. Siemens AG revised its target twice in as many months on the back of EUR1.3bn restructuring charges and delays in turnkey projects, including high-speed trains and offshore wind farms. ABB Ltd recently followed suit with its announcement that 4Q13 would be adversely affected by USD260m due to storm-related delays in its offshore wind projects, restructuring and non-operational charges. Royal Philips reported 4Q13 results this week just in line with expectations, posting growth of 4.5% against a target of 4-6% and reported EBITA margins of 10.5% against its target of 10%-12%. We expect companies to have a higher chance of meeting their targets in 2014 as Europe returns to growth and some short-cycle businesses show timid signs of recovery. It remains to be seen whether new leadership in companies such as Siemens and ABB will become more conservative in setting their targets.

Results from European pharmaceutical companies would have been stronger than in 2012, as patent expiry risk receded. Both Sanofi SA and GlaxoSmithKline plc ended their declining revenue trends during 2013. The results for European pharmaceutical companies will continue to be affected by generic competition and government cost-containment policies in Europe. However, emerging markets and innovation will remain two of the main growth drivers. As expected, this week Novartis AG and Roche Holding Ltd reported strong performances relative to our projections for Fitch-rated European pharma companies in 2013. Novartis' performance was better than we had forecast, as the company benefitted from a delayed entry of Diovan monotherapy.

EMEA aerospace and defence companies are likely to show 2013 results broadly in line with guidance and slightly better than in 2012. The continuing boom in commercial aerospace would have more than offset weak demand for defence products and services in companies' home markets, resulting in revenue growth in the mid-single digits. This would be led by European Aeronautic Defence and Space Company N.V. (EADS), but we expect similar trends at other commercial A&D companies such as Rolls-Royce Holdings plc and MTU Aero Engines AG. Margins would also have trended upwards as a result of strong demand in the civil segments and restructuring measures bearing fruit. Nevertheless, we expect sector-wide FCF generation to remain weak owing to higher capex for new programmes, material working capital outflows stemming from production ramp-up and lower advance payments from defence customers.

We also expect results from European utilities, especially those with significant generation exposure, to have remained subdued and plagued by gas and other thermal capacity write-offs (most recently RWE AG ). Although most players actively hedge their power price exposure, as the downswing continues, earnings are likely to weaken further in their core markets. Regulated and quasi-regulated income streams are steady or improving on the back of capex; however, regulatory determinations have taken a turn for harsher outcomes for regulated utilities (including for the UK water sector).