IAG, AstraZeneca, Shell, Lloyds & Rio Tinto have all reported Q2 earnings; but what nuggets of investor information can be gleaned?
The FTSE 100 is a misunderstood beast. While the index is often invoked as a proxy for the UK economy, the reality is very different, as 82% of FTSE 100 corporate income is derived from overseas. Four of the five companies on this list kowtow to this statistic, with only Lloyds the outlier — a bank which, uncommonly for a bank, has no international income.
This means that these companies’ Q2 earnings can be useful indicators of the health of the global economy.
Let’s dive in:
IAG shares
- IAG’s revenue climbed 45% to €13.6 billion in H1 2023.
- The FTSE 100 company swung to an operating profit of €1.3 billion from a loss of €417 million in the previous year.
- The record first-half profits were attributed to strong demand across its network, especially from the Spanish businesses.
- Flight capacity improved to 94% of pre-coronavirus levels during H1.
- IAG expects capacity for the full year to reach 97% of 2019 pre-pandemic levels, slightly lower than previous guidance.
- Net debt decreased from €10.4 billion to €7.6 billion in the first half, resulting in a net-debt-to-EBITDA ratio of 1.5 times.
- The company anticipates generating sustainable free cash flow in 2023.
- Forward bookings show no sign of weakness, with 30% of flights already booked for Q4 2023, which is typical for this time of year.
While economists fret about the potential for a global recession amid a staggering cost-of-living crisis across western nations, pent-up demand and retained pandemic cash have patently shown that there is more money in the economy than headlines suggest. In particular, IAG’s revelation that 30% of Q4 flights are already booked suggests that this is not simply summer demand. This also bodes well for Rolls-Royce’s results on Thursday.
IAG shares have risen by 33% year-to-date to 171p.
AstraZeneca shares
- AstraZeneca reported forecast-beating profits and sales, boosted by strong performance in its cancer drugs segment, which compensated for the decline in Covid-19 vaccine sales.
- CEO Pascal Soriot seems hugely optimistic about the company’s novel lung cancer trial data.
- Earnings increased by 25% year-over-year to an adjusted profit of $2.15 per share, exceeding the expected $1.98 per share consensus.
- It plans to continue with its trial of an experimental precision drug called Datopotamab Deruxtecan, despite disappointing interim data earlier this month.
- Covid-19 vaccine sales were down significantly compared to 2022 for obvious reasons, and are expected to decline further throughout the year.
- Sales in China, excluding Covid medicines, grew by 7% at constant exchange rates in the quarter, with the company upgrading its guidance for China’s revenue growth in 2023.
- AstraZeneca dismissed rumours about spinning off its China business and reaffirmed its 2023 outlook.
- AstraZeneca’s unit Alexion will acquire Pfizer’s early-stage rare disease gene therapy portfolio for up to $1 billion, plus royalties on sales.
In an economically poor time for biotechs, it’s good to see that AstraZeneca is continuing with both acquisitions and candidate development. This bodes well for potential buyout targets such as hVIVO, Poolbeg, and Avacta — though the key story is that the FTSE 100 company is prepared to continue to invest in China. Given increasingly strained SINO-US relations — tech stock listings, Covid origin arguments, the proposed BRICS currency, the possible TikTok ban, Ukraine, spy balloons, Taiwan, and export bans of various chips/metals — this is a strong vote of confidence that relations will continue to thaw.
AstraZeneca shares have fallen by 3% year-to-date to 11,172p.
Shell shares
- 56% decline in Q2 adjusted earnings to $5.1 billion, due to falling oil and gas prices and weaker refining profit margins.
- This missed company-provided analyst forecasts of $5.8 billion.
- However, while earnings missed forecasts, they were comparable to Q2 2021.
- Q2 2023 performance was lower compared to the record Q2 2022 earnings of $11.5 billion, and the $9.65 billion of Q1 2023.
- Shell is reducing its share repurchase program, repurchasing $3 billion in shares over the next three months, down from $3.6 billion in the previous three months.
- Still raising its dividend to $0.33 per share as announced in June.
- CEO Wael Sawan outlined plans to prioritise share buybacks and improve performance by maintaining oil output, increasing natural gas output, and reducing investments in lower-return renewable energy.
- Analysts considered the numbers disappointing due to lower-than-expected earnings from the upstream and chemicals divisions and weaker forward guidance.
The oil and gas honeymoon is over — with more normal but elevated pricing expected in the near-term. Moreover, a Chinese slowdown could see oil fall further too. The key factor to note is that Shell is reacting by reducing investment into renewables, which may be profitable in the short term but comes at a political cost. Subsidies and preferential tax treatment across the west come with the proviso that hydrocarbon companies will invest in green energy, and Shell is jeopardising this state-based goodwill.
Shell shares are flat year-to-date at 2,366p.
Lloyds shares
- Lloyds reported a higher charge for troubled loans than previously assumed and missed first-half profit expectations due to the weakened UK economy.
- Pre-tax profit for the six months to June was £3.9 billion, up from £3.1 billion a year earlier but below the average analyst forecast of £4 billion.
- Its impairment charge rose by 76% to £662 million, which alongside declining loan volumes, may lead to downgrades of Lloyds’ performance.
- The FTSE 100 bank reported an improved interim ordinary dividend of 0.92p per share, up 15% from the prior year, returning £594 million to shareholders.
- However, the bank did not announce a new share buyback.
- Lloyds and other FTSE banks are under pressure to help struggling savers following Bank of England rate rises, especially after accusations of profiteering.
- The bank’s net interest margin was 3.14% in Q2, down from 3.22% in Q1.
- Lloyds expected net interest margin is to fall more slowly than previously forecast, dipping to 3.10% this year instead of 3.05%.
There is a sweet spot when it comes to the Bank of England base rate — typically thought to be at circa 4%. Below this, banks see lower profits, and above it, higher impairment charges and a weakened economy. Lloyds is now contending with bad loans, mortgage troubles as the UK’s largest home lender, and political pressure to deliver more interest to savers. This will weigh on its share price and profitability through 2023.
Lloyds shares are down 4.5% year-to-date to 45p.
Rio Tinto
- Half-year profit fell by 34% due to weaker commodity prices.
- Its underlying profit of $5.7 billion and interim dividend of $1.77 per share fell short of analyst expectations.
- Net earnings were $5.1 billion after $800 million of impairments against Australian aluminium refineries, partly due to the country’s new carbon policy.
- The dividend payout was lower than in the past two years but still the third-largest interim dividend in RIO’s history.
- Australian iron ore dominated the results, with 6% more volume shipped than the previous year, but iron ore prices received were 11% lower, offsetting these improved volumes.
- Copper prices were down 12%, and aluminium prices were down 25% compared to H1 2022.
CEO Jakob Stausholm has a unique window of insight into China’s economic health — and despite huge efforts to diversify into copper, Rio’s profits remain reliant on healthy Chinese demand — particularly from the property sector. Commodity prices are weakening in anticipation of a global recession but hopes for a US soft landing and softening geopolitical tensions mean prices may rise again soon. Over the longer-term, the metals supply gap should support RIO’s output and share price, but there will likely be choppy waters ahead through H2 2023.
Like Shell, it’s worth noting that even though commodity prices appear ‘weakened,’ they are still at historically elevated levels — and investors may consider and sizeable share price falls to constitute buying opportunities.
Rio Tinto shares are down by 11.8% year-to-date to 5,149p.
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
