Market Report: Fear over profits turns up the heat on Centrica

Rumours were swirling yesterday that Centrica, the owner of British Gas, will have some ropey trading news for shareholders when they gather at the Queen Elizabeth II conference centre in London for their annual meeting on Monday.

Rumours were swirling yesterday that Centrica, the owner of British Gas, will have some ropey trading news for shareholders when they gather at the Queen Elizabeth II conference centre in London for their annual meeting on Monday.

Centrica shares slipped to their lowest level since last June amid fears it is struggling to maintain profitability at its energy supply business while wholesale prices are sharply on the up.

Centrica has been faced with a choice between watching customers desert to cheaper rivals or cutting prices to keep them, and first appeared happy to wave them goodbye. More recently it has said it is seeking ways of keeping them aboard, and the suggestion yesterday is that this has led to a vicious squeeze on margins. Management will have to set out significant progress on cost cutting if it is to avoid disappointing the market.

Yesterday's research from Merrill Lynch, which cut its sum-of-the-parts valuation on Centrica shares by 13 per cent, is the latest in a burst of downgrades to the company's earnings forecasts. Because the consensus forecasts have fallen already, Monday's update might not count as a profits warning. But traders were bracing themselves, nonetheless, selling the stock down 3.5p to 217.5p.

The FTSE 100 posted its sixth successive gain, up 16.6 points to 4,918.9. That is 1,029 points below its level at the 2001 general election, but up 474 points since Labour came to power.

The volume of trading was very light indeed yesterday, as traders spent time assessing the latest general election results. In the event, there was little reason to move share prices as a direct result of the outcome.

The market reflected rather the direction of trading on Wall Street (up, thanks to better-than-expected US employment data). A hung parliament, or something close, might have unnerved the City because of the uncertainty that would have been generated, but traders declared themselves satisfied with the continuity ensured by a solid majority, no matter how reduced.

As for the newly-floated YouGov, the online polling company which came to market at 135p a share last month, it turned out to have passed its first public test. YouGov's predicted share of the vote proved less volatile throughout the campaign than those of its traditional rivals, and its election-eve poll had Labour on 37 per cent to the Tories' 32 per cent and the Liberal Democrats' 24 per cent- no more than one point out in each case. The shares were steady at 136.5p yesterday.

Shire Pharmaceuticals was one of the big blue -chip winners, up 9p to 567p ahead of an update on its pipeline of experimental new drugs next week. Brokers expect bullish news on the prospects for new treatments for hyperactive children and for colon ulcers.

Traders also reacted to new market share data for the UK supermarkets, which showed William Morrison Supermarkets continuing to lose ground. Its shares were hit badly, off 2.5p at 193.5p, while J Sainsbury was up 2.5p to 286.5p after its sales held up rather well.

A big line of BAE Systems stock went through the market, suggesting an institutional investor was taking profits on a bull run in the defence contractors' shares that has seen them run up in a straight line from 104p at the end of 2002 to 259.75p last night, down 5.75p on the day.

WH Smith's City charm offensive after last month's annual results is failing to charm anyone, it is becoming clear. Fund managers have come away feeling confused over the long-term strategy and more nervous than ever about current trading. The shares were down another 12.5p to 318p yesterday, while Woolworths, a fellow generalist retailer, also fell - 0.75p to 36.75p - amid the gloom over the outlook for high street sales.

Cornwell Management Consultants was given a little push, up a ha'penny to 133p. The company, which does IT work for the public sector, had warned that the general election could mean a hiatus in contracts, but that the third-term Labour administration would push ahead with outsourcing work to the private sector.

Debt Free Direct was in focus after news that personal bankruptcies are at their highest ever level in the UK. The company administers individual voluntary arrangements (IVAs), the final alternative before bankruptcy, which are also growing in popularity. A trading update earlier in the week had shown turnover growth running at 119 per cent. Debt Free Direct shares were up tuppence at 152.5p.

And rumours of a profits warning hitKensington shares. The specialist mortgage lender was off 11p at 544p amid concern that housing market activity is drying up.