Retail sales: Reverse gear

Grainne Gilmore

Analysts were expecting May's unexpected surge in retail sales to be reversed in June, but not to this extent. A near 4 per cent fall in the volume of sales in one month is unprecedented — it is the fastest pace of decline since the Office for National Statistics (ONS) first started compiling the figures.

The ONS came under fire for the May figures, with some suggesting that the data, which showed a 3.6 per cent monthly rise, contradicted the trends being shown by other surveys, such as that conducted by the British Retail Consortium, was flawed. But the ONS stands by its figures, saying that May's surge was caused by good weather. Indeed, it has revised May's growth rate up by a percentage point to 3.6 per cent.

But, regardless of the debate over the monthly figures, the three-monthly figures underline the trend of slower growth in sales. Sales in the three months to June grew by just 0.6 per cent, down from 1.7 per cent in the previous quarter. Sales at food stores in the three months to June were 0.2 per cent lower than the first quarter of the year, suggesting that soaring food prices are prompting shoppers to curtail their spending.

In addition, and most worryingly for the Bank of England, inflation pressure is picking up, with the retail sales deflator — an indicator of inflation for high street items — rising sharply to its highest level since May 2007.

Scottish & Southern: Unplugged

Angela Jameson

Scottish & Southern Energy (SSE), the UK's second biggest energy supplier, rarely puts a foot wrong in its dealings with the City or its customers. In the retail environment, it has a track record of being the last to raise prices for domestic customers and this has helped it to pull in many new accounts, taking customer numbers above 9 million for the first time.

But the pressure to pass on its increased costs is becoming unbearable for the group, which issued a downbeat trading statement today. Significant increases to bills are likely in the coming weeks, although the falling oil price may allow the inevitable upwards move to be deferred a little longer.

Without these increases, profits will be eroded and SSE's much vaunted dividend pledge of a 4 per cent real-terms annual increase will be shot to pieces. First-half profits are already set to be substantially lower than in previous years because of the high wholesale cost of gas, the company said this morning. However, what appears to be a profit warning at first glance is far from that. The company is just pointing out that the usual skew of earnings will reverse this year, with a stronger second-half result.

Overall, the energy group is on track to make a modest increase in annual profits. SSE was issuing guidance today that the increase would be between 1 and 5 per cent, to between £1.28 billion and £1.3 billion. Given the backdrop of 60 to 80 per cent increases in wholesale gas prices this year, this will still be a very good result.

Of all the UK energy suppliers, SSE has a good balance of generation and customers, which is reflected it its smoother pricing policy. There have been some setbacks in the performance of its generation capacity this year, as new control equipment is installed. However, that is a temporary problem, which should soon be resolved.

SSE has a well-planned investment strategy, which includes renewables and has diversified into other areas such as home connections, network maintenance, street lighting and boiler repairs. In other words, while its main business is generating, trading and retailing power, it has added defensive features which protect it to some extent from the volatility of the wholesale markets as well as increasing customer loyalty. It's likely to weather high wholesale prices better than most.

BG Group: Dig Deep

Nick Hasell

Three months into a now-hostile bid battle with Australia’s Origin Energy, today’s second-quarter results from BG Group gave investors the chance to appraise the British company’s merits away from the inflated rhetoric of M&A.

Once again, it was BG’s liquified natural gas operations which stood out, with second-quarter profits nearly quadrupling — from £88 million to £367 million — on the company’s ability to divert cargoes to booming Asian markets.

That surge offset a disappointing performance in natural gas production, caused by temporary shutdowns at its facilities in Grangemouth in the UK and Panna in India, and enabled quarterly operating profits to touch a record £1.43 billion.

But it was BG’s success in finding new reserves that gave long-term investors the greatest comfort. Over the last three months, BG has made no fewer than eight significant discoveries, spanning Algeria, Brazil, Norway, Thailand, Trinidad and the UK. The remainder of 2008 promises more of the same, with BG due to provide updates on further drilling in Brazil, Norway, Egypt and Oman.

However, the stock market has paid little heed to BG’s prowess with the drill bit: its shares, partly unsettled by Origin, have underperformed the FTSE all share by five per cent over the last three months to trade at just 10 times 2008 earnings.

That seems mean, given the potential of BG’s extensive Brazilian assets and the possibility that it could itself become a target. Buy at £10.93.

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