UK Inflation Data Means Higher Rates, Recession -3-

1040 GMT - XPS Pensions Group is a countercyclical opportunity and is benefiting from higher inflation, banking crises and volatile markets which are acting as a drag on many companies, RBC Capital Markets says in a note. The U.K. pensions consultancy said it expects full-year results to be ahead of previous expectations and reported an "impressive" 20% revenue growth for fiscal 2023. "Future demand for XPS's services is bolstered by the increasing complexity of the U.K. pensions landscape, and the enhanced importance placed on the pensions sector to facilitate productive investment into the U.K. economy," analysts Mandeep Jagpal and Gordon Aitken say. The launch of the Pensions Regulator's new DB funding code next year will be a seismic opportunity, the Canadian bank's analysts add. Shares rise 1.75% at 174.5 pence. ([e-mail])

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SSE Must Prove the Rewards of Green Investment

1031 GMT - SSE has set out capex of GBP2.8 billion for FY 2024 to invest in green energy projects, with a sum put aside for windfall taxes, AJ Bell analyst Russ Mould says in a note. Although this is eye-catching news for the energy group, shareholders will want to see evidence that they are being rewarded for funding the company too, Mould says. "SSE can argue that its balanced integrated model, incorporating transmission and distribution assets, is what is helping to deliver the proposed record investment," he says. Shares are up 0.9% at 1,886.50 pence. ([e-mail])

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Outlook for Leisure Flights Continues to Improve, UBS Says

1017 GMT - There is an improvement in the number of flights that passengers are willing to board for leisure compared with last year, but it is still below 2019 levels, UBS analysts write in a research note after surveying about 6,500 people. "For leisure flights expectations, we see the most improvement in the U.K. bouncing back to 2019 expectation levels, followed by France," the analysts say, noting a slight deterioration in the U.S. Overall, the number of leisure flights that respondents expect to board in the next 12 months should be 8% lower compared with UBS's 2019 survey. ([e-mail]; @MauroOrru94)

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Aviva's Unspecific Combined Operating Ratio Guidance Weighs on Shares

1014 GMT - Aviva tumble to the bottom of the FTSE 100, trading 5.3% lower at 403 pence after the British insurer posted first-quarter results in which it backed its medium-term combined operating ratio target--a figure that measures underwriting profitability--of over 94%. Citi says the company was reluctant to give specific guidance for 2023 or a normalised first-quarter COR in the call with analysts. "We believe that more specific 2023 COR guidance and greater clarity on the [value of new business] margin methodology would have helped alleviate some of the pushback we heard on the shares today," analysts James Shuck and Andrew Baker say, adding however that they see strong signs of momentum in general insurance, bulk purchase annuity and workplace. ([e-mail])

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UK Construction Stocks Drop as House Price Growth Slows

1002 GMT - U.K. house-builders fall after official data showed average U.K. house prices increased by 4.1% in the 12 months to March 2023, down from 5.8% in February. The average U.K. house price was GBP285,000 in March, GBP11,000 higher than 12 months ago, but GBP8,000 below the peak in November 2022, the Office for National Statistics said. "The slowdown in annual U.K. house price inflation has continued into March," ONS Head of Housing Market Indices, Aimee North, writes. "However, the rapid growth within U.K. rental prices shows no sign of abating, with another annual inflation rise in April." Persimmon, Taylor Wimpey, Barratt Developments and Berkeley Group Holdings are among the biggest FTSE 100 fallers, all down more than 4%. ([e-mail])

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Tullow Oil's Year-End Production Rate Looks Promising

1001 GMT - Tullow Oil's update on its Jubilee wells is positive, Davy Research analyst Colin Grant writes in a research note. The oil-and-gas company said its net production at Jubilee in 1Q was 28,100 barrels of oil per day and that it will ramp up throughout the year from the new wells drilled. "We are optimistic on the potential exit rate at year-end," Grant says. Davy keeps an outperform rating on the stock. The Irish research firm acts a stockbroker for Tullow Oil. Shares are up 1.8% at 25.46 pence. ([e-mail])

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Eric Schmidt Slams EU Move to Regulate AI

0952 GMT - The European Union is erring in its attempts to regulate new artificial intelligence technologies, former Google Chief Executive Eric Schmidt says at The Wall Street Journal CEO Council Summit in London. "The way the EU works, in Brussels, is they just want to manage things, and that's not a winning strategy in a brand new technology," he says. Schmidt says an AI commission he ran for the U.S. government took a position that the country should be a leader in AI and also determine how to manage such new tools. He says he wrote a proposal for the EU about what they should be concerned with rather than AI, which is social media. "But why would they listen to me?", he adds. ([e-mail])

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Severn Trent Booked a Solid Set of Results

0946 GMT - Severn Trent posted a solid set of results with pre-tax, pre-interest profit in line with consensus' expectation and adjusted EPS ahead, RBC Capital Markets analyst Alexander Wheeler writes in a research note. The U.K. water utility booked a 12.2% return on regulatory equity thanks to a 7.7% financing outperformance, which shouldn't be a surprise to the market but still was above RBC's around 6% forecast, Wheeler says. For fiscal 2024, Severn Trent expects earnings to grow significantly as a result of a 15%-20% reduction in the interest charge, which should be anticipated by the market as inflation start to normalize, he says. RBC has a sector perform rating on the stock. ([e-mail])

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UK Gilt Underperformance Likely to Continue as April Inflation Beats Forecast

0943 GMT - The recent underperformance of U.K. gilt yields compared to U.S. Treasury yields and German Bund yields is likely to continue after U.K. April inflation data came in stronger than expected, say RBC Capital Markets analysts in a note. "Following this morning's hot U.K. April inflation prints, we could very well see this recent sharp cross-market underperformance continue - especially given investor positioning is likely skewed towards long gilt positions already," they say. The U.K. 10-year gilt yield is last up 7 basis points at 4.236% while the German 10-year Bund yield falls 2bp to 2.447% and the U.S. 10-year Treasury yield is down 1bp at 3.688%, Tradeweb data show. ([e-mail])

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Close Brothers' 3Q Was Encouraging

0938 GMT - Close Brothers' third-quarter performance was more encouraging than its first-half update, Shore Capital says in a note. The U.K. merchant banking group said its loan book growth accelerated in the quarter, and that net flows improved, analyst Gary Greenwood writes. Meanwhile, shares look cheap considering its high dividend yield, which presents a long-term valuation opportunity, he adds. "We retain a buy recommendation, although Close remains towards the bottom of our list of banks and lenders in terms of upside potential, noting that we view the entire sector as being materially undervalued," Greenwood says. ([e-mail])

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Arbuthnot Had a Good Start to 2023

0921 GMT - Arbuthnot Banking Group posted a positive update and its valuation continues to be undemanding, Shore Capital says in a note after the private and commercial bank said its deposits and lending activity rose in the four first months of 2023 as it continues to benefit from rising interest rates. "We continue to envisage positive momentum in forecasts even after publishing five material upgrades over the past year," analyst Vivek Raja writes. Shore has Arbuthnot as a house stock with a fair value of 1,640 pence. Shares, which are up 11% since the start of the year, trade flat at 942.5 pence. ([e-mail])

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Kingfisher Reports Reassuring 1Q, Longer-Term Benefits Beckon

0918 GMT - Kingfisher shares fall 2% after the home-improvement retail group reported improved trading since early April, but reiterated full-year guidance. The first-quarter update was reassuring, RBC Capital Markets says, with 1Q sales broadly in line with expectations, guidance held for the full year and current trading more resilient than suggested by recent data in the home-improvement sector. Kingfisher's management team has introduced a more effective trading strategy, with a stronger digital offer and better inventory and cost control, RBC says. "We see potential for benefits longer-term from supportive industry trends," RBC analysts say in a note. ([e-mail])

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UK Labor-Cost Inflation Driving Inflation More Than Peers

0915 GMT - The U.K. appears to a have a broad-based problem when it comes to inflation, as labor costs prop up the rate at a higher level than peer countries, says Chris Hare, HSBC senior economist, in a note. Labor-cost inflation is running at around 7.5% year-on-year, much higher than in the eurozone, at around 5%, or the U.S., at roughly 4%, he says. This could be driving some of the inflation strength shown in the April data, Hare says. The jump in the core rate to 6.8% was "a shocker", with unexpected annual-rate rises in a number of components like recreation and second-hand cars, while other components eased by less than expected, including food, he says. Bank of England rate cuts don't now look like a prospect this year or next, he adds. ([e-mail])

Contact: London NewsPlus, Dow Jones Newswires;

(END) Dow Jones Newswires

05-24-23 1044ET