Morning Note: Market news and updates from Shell and adidas.

Market News

The Federal Reserve held rates steady for a fourth straight meeting and cautioned that a March reduction is “not the most likely case”. Powell’s message reflects the lack of consensus across the committee, said Michael de Pass at Citadel. Abrdn expects the Fed to start cutting rates mid-year and follow that by further reductions each quarter. The 10-year Treasury yield dipped below 4%.

US equity markets declined late in the session last night: S&P 500 (-1.6%), Nasdaq (-2.2%). This morning in Asia, markets were mixed: Nikkei 225 (-0.8%); Hang Seng (+0.5%); Shanghai Composite (-0.6%). In China, an official hinted at potential spending plans, while the Caixin manufacturing PMI held at 50.8 in January, as expected.

The Bank of England is expected to hold rates steady today, while delivering a reduced inflation forecast that may open the way for easier policy. Lessening price pressures and the risk the UK tipped into a recession last year prompted markets to price in rate cuts starting in the middle of the year. Sterling trades at $1.2650 and €1.1730, while the FTSE 100 is currently trading 0.2% higher at 7,637.

Source: Bloomberg

Company News

Shell has today released fourth quarter results, which were better than market expectations. The group has raised its dividend by 20% and announced another $3.5bn buyback. In response, the shares are up 1% in early trading.

Shell is an international energy company with expertise in the exploration, production, refining, and marketing of oil and natural gas, and the manufacturing and marketing of chemicals. In the ‘upstream’ business (i.e., exploration & production), four fifths of the profit come from eight core regions: Gulf of Mexico, Brazil, Nigeria, UK, Kazakhstan, Oman, Malaysia, and Brazil. The company is a key player in the LNG market, which is expected to remain tight over the medium term. As part of an integrated energy strategy, Shell is allocating capital to low and zero carbon products and services including wind, solar, advanced biofuels, and hydrogen.

The group’s strategy is to invest in providing secure supplies of energy, while actively working to reduce carbon emissions.  It expects to publish its 2024 Energy Transition Strategy on 14 March. For now, we know that a proportion of capital spending will support the development of low-carbon energy solutions. The group is also aiming to increase efficiency, with annual operating costs reducing by $2bn-3bn by the end 2025.

In the three months to 31 December 2023, adjusted earnings fell by 25% to $7.3bn, ahead of the market forecast of $6.1bn. Compared to the previous quarter, earnings rose 17%, reflecting higher LNG trading and optimisation margins, favourable deferred tax movements, and higher production, offset by lower refining margins, lower margins from crude and oil products trading and optimisation, and higher operating expenses. Underlying operating expenses fell by 4% in the quarter and 1% across the year.

Post tax impairments of $4.0bn were recognised in the quarter, primarily driven by macro & external developments as well as ‘portfolio choices’ including the Singapore Chemicals & Products assets.

The group spent $24.4bn on capital expenditure in the year, in line with its guidance of $23bn-$26bn. This year the guide for spend is $22bn-$25bn. More than a third of cash capex is being spent on energy transition. During the final quarter, the group generated $6.9bn of free cash flow to leave net debt at $43.5bn, with gearing at a comfortable 18.8%.

Shell’s current policy is to return 30%-40% of cash flow from operations (CFFO) to shareholders through the cycle through a combination of dividends and share buybacks. With today’s results, a Q4 dividend of 34.4c a share was declared, 20% above the same quarter last year. The total payout for 2023 was $1.2935, up 25%, and equal to a yield of 4.1%. In addition, the group has been buying back its shares, with the latest $3.5bn programme completed and a new $3.5bn programme announced today to be completed by April 2024.

We believe decarbonisation can’t happen at the flick of a switch – oil and gas will remain part of the global energy mix for decades, with demand driven by population growth and higher incomes, particularly in developing countries where the desire for energy intensive goods and services like cars, international travel, and air conditioning is rising. We also believe the production of the materials needed to transition to net zero can’t happen without using hydrocarbons. At the same time, reduced investment in new production, partly because of environmental concerns, is increasingly leading to constrained supply.

In common with all the oil majors, Shell is looking to reduce emissions in a way that delivers attractive returns for shareholders at a time of macroeconomic and geopolitical uncertainty. Despite strong performance over the last three years, the shares remain on an undemanding valuation, both in absolute terms and relative to the US majors, which fails to discount the potential for free cash flow generation and shareholder returns. We believe they also provide something of a hedge against inflation.

Source: Bloomberg

This morning, adidas released results for 2023 which were better than its most-recent guidance. However, the guidance issued for 2024 was well below market expectations and in response the shares have been marked down by 9% in early trading.

adidas is a multi-brand sporting goods company. Its products have traditionally had a broad global appeal from serious athletes, casual athletes to sports fashion, and from mid-price to high-price points. As a result, the group should be well placed to benefit from the continued focus on health and fitness, the rising middle class in emerging markets, and fashion trends in sportswear.

However, in 2023 trading was impacted by significantly reduced sell-in to the wholesale channel as part of the company’s successful initiatives to reduce high inventory levels. In addition, the discontinuation of the Yeezy business had a negative effect on the top-line. This represented a drag of around €500m on the year-over-year comparison.

Revenue was flat in currency-neutral terms at €21.4bn. Excluding the impact of the Yeezy revenue, growth was 2%. The result is better than the guidance for a decline at a low-single-digit rate, despite the drag from the devaluation of the Argentine Peso in Q4.

The group didn’t provide a breakdown by category (footwear, apparel, accessories, etc.), channel (wholesale, retail, direct-to-consumer, etc.) or geography with today’s release – that will be disclosed with the full results on 13 March.

The company’s gross margin grew by 20 basis points in the year to 47.5%. Operating profit fell by 60% to €269m, much better than the latest guidance for an operating loss of €100m. The outperformance was driven by a better-than-expected operational business in Q4 and the company’s decision not to write off the vast majority of its existing Yeezy inventory. Instead, the company plans to sell the remaining product at least at cost in 2024.

The group issued financial guidance for 2024. Currency-neutral revenue is expected to grow at a mid-single-digit rate, with the second half growing faster than the first. This assumes adidas will sell the remaining Yeezy inventory at cost, which would result in sales of around €250m in 2024. Excluding this impact, growth at a high-single-digit rate is expected in the underlying adidas business. The company is also expecting to generate an operating profit of around €500m, well below the current market expectation of c. €1.2bn.

Source: Bloomberg