Daily market update: Shell, Centrica, Herald, BAE Systems

European markets mostly continued yesterday’s strong session, which saw equities rally globally on hopes of a resolution to the Middle East conflict.

The exception was the FTSE 100 which fell 0.6% as energy stocks weighed on the index amid oil falling back below $100 a barrel.

Shell reported bumper profits, but the market had fully expected that outcome. BAE Systems also pulled back on its trading update as investors were disappointed at the lack of upgrades to its forward guidance.

Shell

Shell’s first quarter profits beat expectations at $6.9 billion. That’s more than double what it made in the previous quarter and more than $1 billion greater than the same period a year ago.

A key profit driver has been the Middle East conflict leading to a spike in oil prices, meaning Shell was able to sell its goods at a much higher price.

The oil price has been volatile since the conflict began on stop-start hopes of a resolution, and that volatility created opportunities for Shell’s trading arm.

Stronger refining margins also helped the quarter’s profit boost, but it wasn’t all plain sailing. Shell suffered product disruption after one of its facilities in Qatar was damaged by an attack in the conflict, and a cyclone caused temporary stoppages at one of its liquefied natural gas sites in Australia.

Calls for a windfall tax on oil profits will only get louder now that both BP and Shell have reported bumper earnings as a direct result of the Middle East war. They might argue that it’s been a tough job operating during the conflict, but the longer oil prices stay higher, the harder it will be for them to oppose any windfall tax suggestions.

Centrica 

Only the tiniest of violins are likely to be played after Centrica revealed that earnings in its British Gas operations will be towards the lower end of guidance. 

A casual observer might see Centrica as an obvious beneficiary of rising energy prices but a combination of warmer weather, commodity price volatility and rising bad debts means the retail-facing part of the group is finding life difficult. 

The infrastructure division, which benefits directly from buoyant energy markets, is expected to do better than previously guided. 

The company is bolstering its footprint through the acquisition of the Severn natural gas power station – though this will hit profit modestly in the short term as it is integrated into the business. 

This acquisition, plus the significant investment planned for 2026, means share buybacks remain off the table for now, and after a strong start to the year the shares are looking distinctly underpowered today. 

Herald investment trust / Saba

Herald Investment Trust lives to fight another day. After considerable disruption from activist investor Saba, Herald has struck a deal that will see it reborn under the care of asset manager Aberdeen.

Fund manager Katie Potts will move over to Aberdeen, and Herald will conduct a tender offer for up to 66% of its issued share capital, effectively providing Saba with an exit close to net asset value.

Saba has agreed to stop any further meddling with Herald for three years and the same for a further eight investment trusts managed by Aberdeen.

Both sides appear to be declaring victory, which is slightly odd. Herald says it has secured its future, while Saba says it has now won six campaigns against UK investment trusts.

While both sides have got something they want, it still feels like a compromise. Herald continues to operate, but risks giving up some of its assets. Saba bought cheaply and can sell a chunk at fair value, yet the standstill agreement means it is effectively silenced as an activist by Aberdeen.

The investment trust industry has been tearing its hair out over the activist’s meddling and might think the Herald outcome is the blueprint to follow if it means Saba can eventually go away.

BAE systems 

A favourable backdrop for BAE Systems is old news for the market and the shares largely failed to fire after its latest update. 

Somewhat counterintuitively, defence stocks have taken a step back during the Iran conflict. As one of the top performing parts of the market heading into the crisis, they were an obvious place for investors to book profits as nervousness started to build. 

News from elsewhere in the sector hasn’t been uniformly positive and there have been rumblings about the role of drone warfare and whether this will render some of the big, heavy, expensive kit sold by the likes of BAE somewhat redundant. 

There is little sign of that yet in BAE’s statement – full-year guidance is unchanged from that given in February and the company can point to several significant contract awards since the start of the year. 

This offers some evidence that the talk, particularly in Europe, about bolstering military capabilities is translating into procurement action. 

The company’s financial strength is touted, and investors may look for further detail on how that might be deployed when BAE reports its first-half results in July.   

JD sports

Regis Schultz’s description of JD’s full-year results as being a ‘resilient performance’ seems generous in the context of a 12% decline in pre-tax profit. He is trying to put on a brave face, but it is clear from the miserable longer-term share price performance that investors aren’t fooled.

The UK has been sluggish amid softer demand for footwear and JD is being caught up in the general high street gloom.

The new financial year hasn’t exactly got off to a good start, with a 2.3% decline in like-for-like sales and a warning of muted market growth in the near-term.

Conditions are unfavourable for JD, with higher oil prices threatening to curb the public’s day-to-day spending. A new pair of trainers are a ‘nice to have’ but non-essential purchase, and they might be down the list of priorities when individuals work out how far their money can go.

Intercontinental hotels (IHG)

The global travel and hospitality sector is not well served by the current uncertain geopolitical backdrop so, in that context, IHG’s latest update is robust. 

The Holiday Inn owner unveiled growth in the key revenue per available room metric which was significantly above expectations. This was supported by strong corporate demand and group bookings with leisure travel looking more subdued. 

This likely reflects a lagged recovery from the pandemic period when in-person events and conferences were put on hold.

Another notable feature of the first quarter was the continued recovery in its Chinese operations which have been a problem child for the group. Strength in this area and the North American market helped make up for an inevitable downturn in the Middle East. 

IHG’s offering is diversified with budget, mid-market and premium options and the company can grow without putting huge amounts of capital to work thanks to its franchise model. 

The continued progress on a $950 million share buyback is testament to its confidence in the outlook and a strong balance sheet.