Daily market update: Markets higher, BP, Intertek, Novo Nordisk, Imperial Brands

European equity markets pushed higher on talk that US and Iranian negotiation teams would continue peace talks later this week.

Brent Crude oil fell to $98 a barrel on renewed hopes of a path towards peace, helping to improve investor sentiment and rev up risk appetite. Miners and airlines were in demand, while oil producers slipped back.

Investors are embracing any nugget of good news as they grow tired of uncertainty caused by the Iran crisis. 

Novo Nordisk continued its comeback efforts with news that it will embrace AI to help with drug discovery. It has partnered with OpenAI to speed up work analysing data, aiming to find the right ingredients to create new treatments and get them to market faster.

While the use of AI in the pharmaceutical and biotechnology industry is not new, it’s a prime candidate for greater deployment going forward.

BP

BP has given a glimpse into how the Middle East war is impacting its business and it’s not all plain sailing.

The spike in oil prices since the beginning of March led investors to expect bumper profits from oil producers. BP doesn’t feel the benefit of higher prices immediately as there is a slight delay due to how output is priced on a one and two-month lagged basis. That suggests any big uptick to production-related earnings won’t be felt until BP’s second quarter.

However, its trading operations did see an instant gain as the industry scrambled to find available supplies. BP said its trading arm’s first quarter was ‘exceptional’.

A tick-up in net debt reflects the need for extra working capital to see it through a turbulent period. That might only be a short-term issue, but it does dampen expectations for BP to share any oil-related windfall with shareholders via buybacks and dividends. BP halted share buybacks in February to focus on debt reduction, and it might argue that any extra income related to the sudden jump in the oil price is better served paying down borrowings.

Intertek

It’s potentially break-up time for testing group Intertek. The FTSE 100 company is exploring a sale or demerger of its energy and infrastructure arm. It’s a classic move by a large corporate whose sum of the parts could be worth more than the whole.

Intertek is involved in multiple industries where it tests whether goods are safe, compliant and reliable. This ranges from verifying the quality of crude oil shipments to checking that electrical goods aren’t going to catch fire.

Hiving off the energy and infrastructure arm would allow Intertek to have a tighter focus on fewer industries. Having a sprawling empire might sound grand, but the modern world has taught businesses that sometimes less is more.

A valuation discrepancy might be a key reason for the proposed split. Intertek trades on a big discount to its two main rivals, and it might have come under pressure from shareholders to find a solution. Bureau Veritas trades on 26 times next year’s earnings and SGS is on 21-times, versus a mere 14-times rating for Intertek.

Demergers can lead to higher valuations, but it’s not guaranteed. In theory, the conglomerate discount would disappear, as a slimmed down entity is easier to understand and analyse. Investors could also choose which of the parts they want to back longer-term once a demerger happens, as some people might only want to support certain business operations and not a bigger beast.

Imperial Brands

Tobacco and vaping can be addictive, which means investors expect steady demand for manufacturers of these products during both good and bad economic conditions. While consumers might feel the pinch during harder times, they might consider tobacco and vaping as essential items, or at least priorities over other items. In theory, that makes the tobacco and vaping sector defensive, but it’s not guaranteed to always work that way.

Imperial Brands’ shares fell on a more cautious outlook where it flagged uncertainties around the Middle East conflict. The spike in energy prices threatens to drive up the cost of living and potentially make borrowing more expensive if interest rates go up. That’s problematic as it could make consumers think hard about where they spend money, even on addictive products like tobacco and vaping. Some people might have no choice but to make cutbacks, even on things they cherish day to day.