Market Report: HMV hits a low note after Merrill downgrade

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HMV is unlikely to have a merry Christmas or a happy new year. That was the conclusion of a research report from Merrill Lynch yesterday which sent shares in the DVD and videos retailer down 5.25p to 178.75p.

The broker said: "Positive news is likely to be thin on the ground and, despite a 31 per cent fall in its share price since the beginning of September, we see little scope for upside in investor sentiment." With these words Merrill Lynch downgraded its stance on HMV to "neutral" from "buy".

And it expects poor trading conditions for the group to continue throughout 2006, as aggressive price discounting and an unexciting music release schedule combine to put pressure on sales and margins. As a result, the broker slashed its earnings forecasts by 12 per cent for the current year and 8 per cent for 2006.

The fact that MVC, a rival to HMV, went into administration this week shows just how hard things are in the video and music retailing space. According to MVC's administrators, the company collapsed because of increased competition from supermarkets in music and DVDs, higher levels of downloading from the internet and the company's lack of scale compared with its rivals.

Because of its strong cash flows, HMV has frequently been tipped as vulnerable to a private-equity bid. However, Numis Securities said yesterday it is very sceptical that such a scenario will come to pass. It pointed out that a financial buyer will struggle to find an exit route for such an investment in three to five years.

BAE Systems featured as the best performer in the FTSE 100 for the second successive day, rising 15p to 385p, as brokers started to put figures on just how much money the company will make from the Government's latest arms deal with Saudi Arabia.

Morgan Stanley believes the agreement will add at least £8bn to BAE's order book. The broker said: "Following Wednesday's 6per cent rise on the announcement, we expect BAE shares to remain strong as more details regarding the contract's scope are released."

Dresdner Kleinwort Wasserstein said it is difficult to quantify the implications of the deal on BAE's profits at this stage, but suggested it could boost the company's earnings by between 10 and 15 per cent a year, starting in 2007.

Vodafone added 1p to 123.5p as it emerged that Arun Sarin, the chief executive of the mobile phone giant, had bought 100,000 shares at 123.5p.

The FTSE 100 rose 9.6 points to 5,597 while the FTSE 250 registered a much more impressive 63-point gain to close at a fresh all-time high of 8,727.

An upbeat trading statement from Wilson Bowden, 76p higher at 1,466p, set the housebuilding sector alight. Redrow rose 25.75p to 539p, Bovis Homes added 34.5p to 776p, Taylor Woodrow improved 12.75p to 374.5p, George Wimpey put on 14.5p to 475p and Barratt Developments put on 23p to 990p. Wilson Bowden indicated that there had been a sharp pick-up in housing market activity over the past 11 weeks as buyers' confidence returned.

Wolfson Microelectronics dropped 7.25p to 316.5p after David Carey, its chairman, sold 100,000 shares at 314p. McBride lost 5.5p to 160.5p after the detergents maker complained of a downturn in trading, especially in France. Vague bid rumours pushed Kensington 0.5p higher to 900.5p. Gossips reckon the mortgage lender receivea takeover approach in the new year.

Lower down the pecking order, Hat Pin held steady at 63.5p despite news that Paul Billett, the finance director of the recruitment group, had bought 10,000 shares at 62p. There was also director share-buying at Monterrico Metals but on an altogether bigger scale. Shares in the mining group jumped 14p to 389p after Chris Eager, the chief executive, bought 5,000 shares at 376p while Ray Angus, the chief operating officer, picked up 10,000 at the same price.

Oxus Gold sparkled, rising 2.25p to 72p as it emerged that RAB Capital, the hedge fund, had bought an extra 2.2 million shares, taking its holding to 19.2 per cent. Griffin Mining ticked 0.25p higher to 59p as dealers reported heavy institutional demand for the stock.

Renold, steady at 60.5p, disclosed that JP Morgan Asset Management had sold down its shareholding in the chain maker to below 3 per cent. The fund manager is said to have sold the bulk of its stock to Steel Partners, the activist US investment company which at the latest count held 7 per cent of Renold.

Finally, London Capital Group enjoyed a strong debut on AIM. Having raised £15m at 82p, the company, which owns Capital Spreads, saw its stock close at 85.5p. LCG will use the fresh cash to reduce its debt burden and develop its business.