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Year past and year ahead: Carillion, Lloyds, RBS and BT Group in focus

Carillion, Lloyds, RBS and BT were in the spotlight in 2017 and are likely to remain closely eyed by investors in 2018
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In November Carillion issued its third profit warning for the year due to its failure to improve profit margins

Brexit uncertainty and a slowdown in the British economy weighed on businesses in 2017, resulting in a wave of profit warnings.

Carillion PLC (LON:CLLN), Provident Financial PLC (LON:PFG), Dixons Carphone Plc (LON:DC.), Interserve PLC (LON:IRV), Centrica PLC (LON:CNA) and GKN PLC (LON:GKN) were among the slew of London-listed firms to issue profit warnings in 2017 as consumer confidence weakened following the UK’s vote to leave the European Union.

Carillion issues three profit warnings

In November Carillion issued its third profit warning for the year due to its failure to improve profit margins across UK support service contracts, delays to asset disposals and to the start of a significant project in the Middle East. 

The group also said it would breach its banking covenants and that full year net debt is expected to rise to between £875mln and £925mln.

Provident Financial hit by troubles at doorstep lending arm

Sub-prime lender Provident Financial had a string of bad news this year, including two profit warnings, the resignation of chief executive Peter Crook and the sudden and untimely death of executive chairman Manjit Wolstenholme.

A botched plan to take its sales force in-house and troubles at its doorstep lending division have resulted in expected losses for the year and the decision to scrap its dividend. 

UK mobile competition hurts Dixons Carphone

Dixons Carphone in December cut its full year profit forecasts following a slump in first half profits due to challenges in its UK mobile business. That marked its second profit warning in four months.

In response, the company plans to overhaul the mobile division, which has come under pressure as consumers hold onto their handsets for longer rather than updating to the latest releases due to the Brexit-driven slump in the pound driving prices higher.

Interserve trading slows

In October, Interserve said it could breach its banking covenants as it slashed its estimates for second half operating profit.

Trading slowed in the third quarter with its UK support services business affected by higher costs and challenging market conditions.

Centrica loses customer accounts

Centrica, the owner of British Gas, in November said full year earnings will be lower than market forecasts after losing customer accounts due to tough competition.

The group also said it would be scrapping a higher standard variable tariff (SVT) for new UK customers and introducing a new fixed-term default tariff in response to the UK government’s planned energy price caps.

GKN’s US aerospace business under pressure

GKN PLC (LON:GKN) gave incoming chief executive Kevin Cummings the boot in November as it announced a further write-off at the struggling US aerospace business following a profit warning a month earlier.

Cummings left just weeks before he was due to take up the top job, leaving the company without a successor to Nigel Stein, who was to retire at the end of December.

Banks recover in 2017

On the reserve side, the UK’s major lenders showed recovery on the back of turnaround efforts after the 2008-09 financial crisis.

Lloyds Banking Group (PLC:LLOY) was the star performer this year as it reported robust profit growth, announced healthy dividends and returned to private hands in May following its taxpayer bailout during the financial crash.

In its most recent trading statement, the bank reported a surge in third quarter profit on the back of its acquisition of credit card business MBNA and the absence of further provisions for its payment protection insurance mis-selling scandal.

Royal Bank of Scotland Group PLC (LON:RBS) posted its third consecutive quarter of profit in the third quarter as restructuring and misconduct costs fell.

The bank, which is still more than 70% owned by the taxpayer, expects to return to a full year profit in 2018 but is still awaiting a hefty fine by the US Department of Justice (DoJ) for its role in selling subprime mortgages in the lead up to the financial crash.

The government has announced plans to sell its stake in RBS following its bailout during the financial crash, though at an expected loss to taxpayers.

Barclays PLC’s (LON:BARC) turnaround progress was mainly thanks to its decision to offload non-core assets, including its Africa division.

All the UK’s major lenders passed the Bank of England’s stress tests this year. The BoE found that none of Britain’s major lenders needed to raise extra capital for the first time since starting the tests and could handle a Brexit-driven recession without a government bailout.

However, the Bank said the combination of a disorderly Brexit, a severe global recession and misconduct costs could result in more severe conditions than in the stress test.

Brexit the focus of 2018               

Negotiations between the UK and the EU for a new trade deal will be the prime focus in 2018 given its potential impact on the economy.

EU’s chief Brexit negotiator Michel Barnier has warned that securing a full trade deal by autumn would be a “furious race against time”.

Banks and financial services firms have already put contingency plans in place in the event the government is unable to secure a new trade deal.

HSBC, JP Morgan, UBS and Goldman Sachs, have signalled they would move jobs and operations to the EU to ensure they can continue to trade freely across the bloc after Brexit.

Lloyds plans to set up a Berlin office as its post-Brexit European hub, while RBS has chosen Amsterdam, and Barclays is expanding its Dublin operations.

Prime Minister Theresa May is trying to negotiate a two-year transition deal to ease the burden for businesses following the UK’s withdrawal from the EU but the worry is that the government is running out of time.

Bank of England Governor Mark Carney has warned that without a transitional deal banks would need to start moving staff and setting up offices in the EU from as early as the first three months of next year.

BT facing regulatory headwinds

Upcoming regulatory changes in telecoms, gaming and energy will also be eyed in 2018.

BT is among the companies facing regulatory headwinds with Ofcom proposing the group should cut the wholesale prices its network sUBSidiary Openreach charges telecoms operators.

Such a move could disrupt BT’s plans to invest in broadband network upgrades to deliver ultrafast speeds to 12mln premises by the end of 2020.

Investors have also raised concerns BT could cut its dividend amid rising costs of securing broadcasting sports rights and investing in customer service improvements.

BT has long competed with Sky PLC (LON:SKY) for the broadcasting rights to Premier League and Champions League football.

But BT has agreed a deal to market and sell Sky’s video streaming service Now TV, which includes Sky Sports, to its customers on its set top box ahead of the next bidding round for the football rights in February.

Review of fixed-odds betting terminals

In gaming, the government has proposed a crackdown on fixed-odds betting terminals (FOBTs) after MPs raised concerns the machines were too addictive and fuelled problem gambling.

The government started a 12-week consultation in October to consider cutting the maximum stake allowed on FOBTs to between £50 and £2 from £100 currently.

The outcome of the so-called triennial review will determine how much GVC Holdings (LON:GVC) pays in its planned takeover of Ladbrokes Coral Group PLC (LON:LCL). GVC has offered to buy Ladbrokes Coral for up to £4bn but the final price could be as low as £3.2bn depending on the review.

Energy price cap

The government plans to put a cap on standard energy prices, which could hurt profits of the big six suppliers including Centrica, SSE plc (LON:SSE), EDF Energy, E.ON, npower and Scottish Power.

Regulator Ofgem said standard variable tariffs (SVTs) offered by the big six in August were on average almost £320 per year more expensive than their cheapest deals.

Rising competition from new market entrants has already put pressure on the big six so investors will be keen to see how they deal with the proposed changes.

Centrica has recommended a phase-out the SVT and all so-called ‘evergreen’ contracts that automatically renew an agreement after the expiry date.

Ahead of the planned price cap, SSE plc (LON:SSE) has proposed a merger with npower in an effort to cut costs and strengthen its position. 

But the deal still needs approval by the Competition and Markets Authority and MPs have raised concerns that a merger could hurt consumers by reducing choice.

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June 28 2018
"This has been another successful year in which the group has achieved a 25% uplift in NAV, significant lettings successes across recently completed developments leading to a 21.49% increase in contracted rent and a strong performance across our key metrics," said the CEO, John Arnold.

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