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Business Analysis & Features

Market Report: Cash outflow fears drive Invensys to fresh lows

Invensys slumped to a fresh low for the year yesterday, and if you believe the latest research from Lehman Brothers, shares in the engineering conglomerate have further to fall.

Invensys dropped 0.75p to 11.25p as the US broker set a price target of just 7p on the stock and warned investors it sees "limited upside opportunities for equity holders".

As ever, the problem at Invensys is that it is bleeding cash. Lehman forecasts the engineer will suffer a cash outflow of £67m next year and £32m in 2007. It does not expect the group to start generating cash until 2008. Now that is a long time for investors to have to wait. As for earnings at Invensys, Lehman slashed its forecast for 2006 and 2007 by 64 and 35 per cent respectively.

According to the broker, last week's annual results from the group combined disappointing revenue and order-book performance. Lehman was also not impressed with Invensys' outlook statement which, it believes, "indicated that the road ahead remains challenging". Given the company's sizeable debt burden, investors have long worried that the group is in danger of breaching its banking covenants.

Although the US broker was able to confirm that there was no breach in these covenants for the period up to the end of March, it said it cannot determine whether they are at risk of being broken further down the line.

Meanwhile, the FTSE 100 gained 18 points to 4,989.8. The FTSE 250 managed an altogether more impressive performance, rising 52 points to 6,987. Next gave up 2p to 1,501p as Dresdner Kleinwort Wasserstein was heard telling clients the retail sector was unlikely to be in a position to outperform the wider market for a long time.

Elsewhere, P&O dropped 5p to 314.75p after Citigroup cut back its rating on the ports operator to "hold" from "buy". The stock has outperformed the market by 14 per cent over the past month. This performance has been partially aided by rumours of a bid for P&O from Temasak, Singapore's state investment agency. Although, Citigroup thinks that such a scenario is possible it noted that there is no tangible evidence to support the takeover story.

Another day of gains by Marconi, 8p better at 299p, sparked vague talk that a predator may be circling the once-again troubled telecoms equipment maker. Analysts, however, were unconvinced by the theory. They argued that the company's £140m pension-fund deficit is likely to deter potential buyers as it is equivalent to about one-quarter of the group's stock-market value. Marconi was plunged into into crisis last month when BT, its biggest customer, abandoned the company in favour of a cheaper Chinese supplier.

Regal Petroleum continued to lose ground, falling 9.5p to 84.5p as yet more institutional investors ditched the company. Evolution Group, which last month arranged a £45m fund raising for the oil and gas explorer at 390p, lost 4p to 120p. Liontrust Asset Management ticked 3.5p higher to 258.5p as punters took the view that the group's days as an independent entity are numbered. It was not long ago that Liontrust was locked in takeover talks. These, however, came to nothing.

Lower down the pecking order, Bob Morton, the millionaire investor, honed in on the recruitment sector. Multi Group, in which he has a 56 per cent stake, announced it had bought a 4.6 per cent holding in Lorien, up 3.5p to 43p. Multi also said it may table an offer for the whole of the recruitment tiddler. Mr Morton controls 17.4 per cent of Lorien though Southwind, his family investment vehicle.

Xenova lost 0.38p to 4.37p after the biotech reported widening first-quarter losses. Analysts expressed concerns about the company's dwindling cash pile. It stands at £9.4m, which is not sufficient to fund Xenova for the next 12 months.

Interlink Foods put on 17.5p to 660p on talk of strong trading at the cake maker. Gossips seem convinced that results from the company in July are set to impress. Likewise, whispers that Carrs Milling is performing ahead of budget pushed its shares 10p better to 526.5p. Elsewhere, Copper Resources, pegged at 38.5p, announced the appointment of Sir Sam Jonah, the former Lonmin executive, as its new chairman. He is president of AngloGold Ashanti, one of the world's largest gold-mining companies.

Finally, word has it Sopheon, unchanged at 27.75p, will unveil the latest version of its software today, which it has developed in collaboration with Microsoft. Pfizer, GlaxoSmithKline and Cadbury Schweppes use Sopheon's software and the three are expected to upgrade to the improved version in due course.