LONDON MARKET PRE-OPEN: Rolls-Royce Sees GBP3 Billion Cash Outflow

(Alliance News) - Momentum from the US and Asia overnight is set to flow into London stocks on ...

Alliance News 9 July, 2020 | 7:42AM
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(Alliance News) - Momentum from the US and Asia overnight is set to flow into London stocks on Thursday and help reverse some of the previous session's losses.

In early UK company news, jet engine maker Rolls-Royce Holdings said its free cash outflow was GBP3.0 billion in the first half, while housebuilders Persimmon and Vistry reported lower completions in the first half of the year, a period dented by the UK's Covid-19 lockdown.

IG says futures indicate the FTSE 100 index of large-caps to open 19.34 points higher at 6,175.50 on Thursday. The FTSE 100 closed down 33.74 points, or 0.6%, at 6,156.16 on Wednesday.

"Asian stocks are seeing modest gains tracking US tech shares, which climbed to new highs, as investors looked past tensions between Washington and Beijing," said Stephen Innes, chief global markets strategist at AxiCorp.

Tensions between the US and China have been sparked recently over China's new security law in the city.

Bloomberg News on Wednesday said White House aides are considering undermining the Hong Kong dollar's peg to the greenback to put a strain on the 37-year-old peg – possibly by limiting local banks' access to US dollars – as one of a number of measures as Washington looks at ways to respond to the controversial law.

"The uptick in sentiment seems unrelated to any specific news flow, as most of the offered-up market stories could have been applied equally over the past two weeks," Innes added. "For the time being, it seems investors are content to ride the narrow ranges."

In Asia on Thursday, the Japanese Nikkei 225 index closed up 0.4%. In China, the Shanghai Composite is up 1.0%, while the Hang Seng index in Hong Kong is down 0.2%.  

China's factory-gate prices fell at a slower-than-expected rate in June, official data showed, as the country works towards recovering from the coronavirus while grappling with a heavy blow to global demand.

The producer price index fell 3% from a year ago, according to National Bureau of Statistics data, but remains weak owing to the Covid-19 pandemic fallout. PPI has been at four-year lows recently, shrinking 3.7% in May.

China's consumer price index came in at 2.5%, a 0.1 point rise from May, on the back of a pick-up in food prices and in line with forecasts. In particular, pork prices, a driving factor behind surging inflation last year, rose 81.6% on-year in June, a similar pace to the month before.

In the US on Wednesday, Wall Street ended in the green, with the Dow Jones Industrial Average ending up 0.7%, the S&P 500 up 0.8% and Nasdaq Composite closing 1.4% higher.

The US recorded 55,000 new coronavirus cases in 24 hours Wednesday, a tally by Johns Hopkins University showed, bringing its total to over 3.0 million infections since the pandemic began. Coronavirus cases are surging in several southern hotspots including Texas, Florida, Louisiana and Arizona, but the pandemic has almost entirely receded from its former epicenter in New York and the north-east.

Wednesday morning, Trump called on schools throughout the country to reopen in the fall, lashing out at his own top health agency to ease health and safety requirements aimed at slowing the spread of the virus, such as social distancing.

In early UK company news, Rolls-Royce Holdings said its free cash outflow was GBP3.0 billion in the first half.

This included GBP1.1 billion less in cash inflow due to lower receipts, with wide-body engine flying hours down 50% in the first half - and 75% lower in the second quarter - together with lower engine deliveries. A further GBP1.1 billion stemmed from a one-off adverse impact from the cessation of invoice factoring, and the firm also cited increased inventory and debtor balances.

"Our rate of cash outflow is expected to ease in the second half supported by increased benefits from cash mitigation actions, the timing of working capital movements and the anticipated ongoing recovery of commercial aviation from the trough reported in April," the jet engine maker said.

Rolls-Royce anticipates a gradual recovery in its end markets as travel restrictions ease over the coming months. Wide-body engine flying hours are expected to be down around 55% this year, and it continues to plan for about 250 wide-body engine deliveries in 2020.

The FTSE 100 constituent is targeting GBP750 million free cash flow in 2022.

"These are exceptional times. The Covid-19 pandemic has created a historic shock in civil aviation which will take several years to recover. We started this year with positive momentum and strong liquidity and acted swiftly to conserve cash and cut costs to protect Rolls-Royce during the pandemic," said Chief Executive Warren East.

Persimmon said housing completions fell in the first half but it is entering the remainder of the year in a "strong position".

The housebuilder said it generated revenue of GBP1.19 billion in the first half of 2020, down from GBP1.75 billion a year ago, as completions fell to 4,900 from 7,584. The average selling price, however, rose to GBP225,050 from GBP216,942.

Persimmon said it has seen good activity in the six week period since sales offices re-opened in mid-May following the UK's lockdown, with average weekly net private sales reservations of 278 new homes, around 30% higher than the same period last year.

Customer enquiries remained at "healthy levels" throughout the lockdown period, Persimmon added.

"We enter the second half in a strong position, with work in progress well advanced, forward sales c. 15% ahead year-on-year, and cash holdings of c. GBP830m. Our financial strength and the agility of the business in responding to Covid-19 has ensured Persimmon is in robust health, and fully able to play its part in delivering the new homes the country needs to support the UK's recovery, in a range of future economic scenarios," said Chief Executive Dave Jenkinson.

Fellow housebuilder Vistry Group warned margins are expected to be hit in the first half due to Covid-19.

For the past ten weeks, the mid-cap firm said it has seen a week-on-week increase in sales rates, and over the last four weeks the average private sales rate per site per week including Vistry Partnerships' mixed tenure operations has been 0.62.

Vistry said first half completions were 1,235, less than half of the 3,371 recorded a year ago, and warned margins are expected to take a hit.

"The wide-ranging effects of Covid-19 are expected to impact margin for the first half across the business. The business has incurred additional costs directly related to the period of lockdown, lower levels of operating efficiency from social distancing and the lengthening of development period expectations. Margin is also impacted by our policy of recognising the full sales and marketing costs across the financial year, similar to administrative expenses, rather than apportioning," said Vistry.

There has been a continued improvement in customer demand over recent weeks, while house prices have remained stable.

Recruitment firm PageGroup said second quarter profit slumped but activity levels have started to pick-up in several markets.

Gross profit tumbled 47% to GBP118.3 million in the second quarter, with gross profit from permanent recruitment down 54% and from temporary down 24%.

"Having weathered a particularly challenging Q2, we now look forward to driving improved activity and gross profit through the second half," said Chief Executive Steve Ingham.

During the second quarter, activity levels started to tick up in several markets and, in order to drive this into profit, PageGroup reinstated all its staff back to full pay from the start of July.

Safe haven asset gold was quoted at USD1,809.96 an ounce early Thursday, soft on USD1,811.86 on Wednesday, but still trading around its best levels since 2011. Brent oil was trading at USD43.14 a barrel early Thursday, higher than USD42.86 late Wednesday.

The dollar was lower across the board on Thursday as the mood picked up.

Sterling was quoted at USD1.2637 early Thursday, higher than USD1.2575 at the London equities close on Wednesday. The euro traded at USD1.1358 early Thursday, up from USD1.1322 late Wednesday.

Against the yen, the dollar was quoted at JPY107.24 versus JPY107.47.

The economic events calendar on Thursday has the latest US jobless claims figures at 1330 BST.

By Lucy Heming; lucyheming@alliancenews.com

Copyright 2020 Alliance News Limited. All Rights Reserved.

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Securities Mentioned in Article

Security Name Price Change (%) Morningstar
Rating
PageGroup PLC 381.40 GBX -0.42 -
Rolls-Royce Holdings PLC 260.31 GBX 3.05
Persimmon PLC 2,385.00 GBX -0.91 -
Vistry Group PLC 619.50 GBX -0.72 -

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