It’s 30 degrees in the shade (almost). And it’s only 8.30am. It’s going to be 34 degrees later. And it just has to be the busiest corporate reporting day of the year, doesn’t it? Why? Because every FTSE 350 director wants to **** off on holiday tomorrow. Dear London Stock Exchange, when will you do something about this results frenzy? I already need a drink — and I don’t mean coffee.
So let’s start with drinks — and Diageo. Its customers in the US, EU, China, Canada and Mexico could doubtless do with a snifter, too, but were being threatened with higher prices because of hot-headed tariff wars. US whiskey faced an additional 25 per cent tax in the EU, as Europe planned to respond to tariffs placed on European imports in the US. Similar levies were being put in place in China, Canada and Mexico. That was potentially a big problem, as Hargreaves Lansdown analysts noted that North American whiskey brands like Bulleit accounted for some 9 per cent of Diageo’s sales. This morning’s news that cooler heads have prevailed — and the EU and US have agreed a ceasefire in their trade war, agreeing to work together on reducing transatlantic tariffs — should therefore boost Diageo’s shares.
So should news that full-year operating profit was up 3.7 per cent to £3.7bn — despite organic growth being partially offset by adverse exchange rates. All regions reported higher sales, with organic net sales up 5 per cent. Organic operating margin was up 78 basis points, against a target of improving this by 175 bps over the three years to 2019. Shareholders will also drink to news of a share buyback programme to return up to £2bn in the coming year and a final dividend increase of 5 per cent.
Quick sip. Right . . . next!
AstraZeneca has been trying to convince investors that newer drugs can make up for falling sales of Crestor and other ex blockbuster drugs that are coming off patent. It looked like they might do this towards the end of 2017, but overall sales fell again in the first three months of 2018.
So this morning’s news that sales of new medicines were up 75 per cent, or 69 per cent at constant exchange rates, was at least encouraging. However, it was not enough to prevent total revenue declining by 1 per cent, or 5 per cent at constant rates, in the first half. Although emerging markets drug sales were strong — up 14 per cent — this growth was offset by the loss of Crestor exclusivity in Europe and Japan. That meant reported operating profit declined by 21 per cent to $1,5bn, mainly because of these falling sales and a lower gross margin, as costs rose.
Investors had high hopes for the cancer drugs Lynparza and Tagrisso, and so may be encouraged by chief executive Pascal Soriot saying they had “established themselves as major drivers of product sales”. In oncology, strong results were achieved by Lynparza in first-line ovarian cancer. Mr Soriot still insists he is “firmly on track to return our company to Product Sales growth in 2018.” Guidance for the year had previously been for low-single digit growth.
Might need a glass of water.
Next up, Royal Dutch Shell. What shareholders want to see flowing here is cash, as much as oil. Cash flow disappointed some analysts in the last two quarters, which management blamed on one-off negative factors. But they expected it to improve to $10bn in the second quarter of 2018. So this morning’s news that it was only $9.5bn, down on the same period in 2017, will be a disappointment.
Analysts had been watching cash flow closely to assess Shell’s ability to fund returns to shareholders. Thankfully, Shell still thinks it is enough to begin a hotly-anticipated $25bn share buyback programme. HSBC analysts had thought Shell might want to get gearing down to 20 per cent before restarting buybacks — but evidently today’s 23.6 per cent is low enough. Will that be sufficient to take their minds off the fact that earnings on a current cost of supply basis — the measure tracked most closely by analysts — came in at $4.7bn for the half year, which was well below a consensus forecast of $5.9bn?
Another quick sip.
And then there is Sky. But does this really matter, given what’s been driving its share price all year is the bidding war between Comcast and Disney? Their ever-higher offers have seen the share price rise more than 50 per cent year to date already.
This morning’s quarterly trading statement could at least justify the current £14.75 from Comcast, an even higher offer from Fox backed by its would-be acquirer Disney, or an even higher knockout bid from Comcast.
Is the 5 per cent increase in like-for-like revenue to £13.6bn announced by Sky enough to do any of that? Or the 7 per cent rise in statutory operating profit to £1.03bn? Or the 70 bps cut in operating costs? Or the 39 per cent rise in Q4 customer growth to more than 23 million European households?
It may be entirely academic. Analysts suggest Comcast’s decision to drop its own bid for Fox in the US and focus on Sky in can be interpreted as either: an implied division of the spoils, letting Disney take Fox if Comcast can have Sky; or a move to free-up extra financial firepower — warning Disney/Fox it will go ever higher.
Let’s look at shopping centre group Intu. It has swung to a first-half loss as chill retail winds blow through its air-conditioned malls — and reduce the book value of its properties. A fall of £650m, or 5.6 per cent, in property values sent the FTSE 250 group to a £507m pre-tax loss in the six months to June, from a £123m profit a year earlier. No wonder rival Hammerson decided to withdraw a takeover bid after investors began to sweat earlier this year. That process ended up costing Intu another £6m.
Time for Virgin Money? Its investors — and merger partner CYBG — might need a stiff one this morning. Virgin has been forced to write off millions in previously-booked profits from its credit card business after making overly-optimistic forecasts about customer behaviour. That was after the Bank of England warned banks about the practice of “effective interest rate accounting” — through which lenders can book in advance some of the revenues they expect to receive once credit card introductory periods end.
And do you want some moderately good news to take on your holiday with your duty free? Struggling low-cost airline Flybe has managed increased passenger numbers and revenue even as it cut seats.
Phew. I need a lie down.
Today’s Lombard column focuses on GlaxoSmithKline’s $300m gene testing deal:
GlaxoSmithKline has just paid $300m for a one-sixth stake in a gene profiling company that will tell you how much of your DNA, back hair and propensity to sneeze can be traced to Neanderthals. By contrast, the company, 23andMe, charges hirsute hanky wielders only £55 to find this out. But that is precisely the point. GSK is spending so much because genetic tests now cost so little — less than 23andMe used to charge, as it has persuaded 4m customers to share their data for medical research — and little enough for many to see it as harmless fun. As one reader of the FT Alphaville blog argued, discovering a propensity for cancer or Parkinson’s disease is “possibly not such fun”. Still, that is what 23andMe is also authorised to do, if customers wish. GSK’s investment will therefore enable it to do the same, to help discover new drugs.
Read the rest of today’s Lombard column here.
FT Opening Quote, with commentary by Matthew Vincent, is your early Square Mile briefing. You can receive it by email at 8am every morning by signing up here.
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