Rolls-Royce and BP join UK earnings winners

Rolls-Royce and BP have joined a procession of large UK companies that made bigger-than-expected profits in the second quarter, bolstering confidence in the health of corporate Britain even as the domestic economy slows.

Shares in Rolls-Royce rose more than 10 per cent on Tuesday in response to its surge in earnings, while BP’s were up 2.4 per cent, adding to the optimistic mood set by strong results from HSBC on Monday.

Profit growth has averaged 20 per cent from Britain’s biggest companies in the three months to June 30, according to UBS, helped by a recovery in commodity prices and the depreciation of the pound, which flattered earnings made overseas.

Earnings from FTSE 100 companies have beaten analysts’ consensus expectations by an average of 1-2 per cent, according to UBS.

Direct Line, the insurer, and Intertek, the product-testing group, were among the latest to beat market forecasts with strong results on Tuesday. Direct Line shares rose more than 6 per cent.

Caroline Simmons, deputy head of UK investment at UBS, said the results were mostly a reflection of global economic growth, given that Britain accounts for only about 30 per cent of FTSE 100 revenues.

She cautioned that the second quarter was the last to benefit from comparisons with a stronger pound before the UK’s vote to leave the EU in June 2016, meaning that the boost from foreign exchange effects would be likely to fade in second-half results.

Three-quarters of aggregate quarterly earnings growth was attributable to higher commodity prices compared with a year ago, according to UBS. One of the biggest beneficiaries was Royal Dutch Shell, which reported a trebling in quarterly earnings last week.

The oil price recovery has faltered over recent months and BP’s profits fell by 5 per cent on a year-on-year basis because of a writedown on assets in Angola. However, they still came in ahead of expectations, helped by deep cost cuts.

“The market was looking for evidence that oil companies can adjust to living at a relatively low oil price and they got it,” said Ms Simmons.

Rolls-Royce beat expectations with a cash outflow lower than analysts had forecast during the half-year, in a sign of a turnround gaining traction at the aero-engine maker. The group said cost savings from a restructuring were ahead of plan, while revenues were boosted by greater engine sales and more maintenance work.

David Larkam, an analyst at Numis, said it had been an impressive earnings season for UK engineering companies: “Everybody seems to be slightly outperforming.”

Among banks, HSBC was the star performer, with a 57 per cent rise in second-quarter profits, boosted by revenues growing faster than forecast — particularly in Asia where the bank makes three-quarters of its profit — and loan losses that fell more than expected.

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