Feb 4 (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
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).