Market Report: Optimism over JJB shines out from retail gloom

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The Independent Online

JJB Sports was a bright spot in an otherwise gloomy day for the retail sector yesterday as investors piled into the stock before its results next week.

JJB Sports was a bright spot in an otherwise gloomy day for the retail sector yesterday as investors piled into the stock before its results next week.

The optimism towards JJB, up 4.5p to 212.5p, seems to have been prompted by Investec Securities which slapped a "buy" rating on the company and suggested it was a good bet in the run-up to the figures.

Investec believes that the 20 per cent discount to the wider sector at which JJB trades istoo great. It predicts the group's full-year results on Wednesday will come in slightly above expectations and could herald a return to like-for-like sales growth at the company.

JJB has long been tipped as a target for a management buyout, led by its chairman David Whelan, whose family control more than 30 per cent of the company. Investec, however, is unconvinced by this theory. The broker said: "We do not believe David Whelan is of a mind to either take the company private or sell out to an external bidder."

Given there is a possibility that Mr Whelan's beloved Wigan Athletic (which he controls) may be promoted to the Premiership at the end of this season, Investec believes the JJB chairman will come under pressure to spend more money on players, and so is unlikely to want to take on either the debt or the responsibility of taking the business private. And while he may want to raise funds to buy players, the broker does not expect him to do so at the expense of selling out of JJB completely.

Meanwhile, most other listed retailers were in retreat. Laura Ashley dropped 0.25p to 12p, Carpetright gave up 3p to 940p, Matalan fell 0.5p to 233.25p, Next dropped 5p to 1,584p and Marks & Spencer lost 4p to 342p amid gloomy comments from Dresdner Kleinwort Wasserstein. The German broker argued that the "consumer slowdown is upon us" and noted that UK retail sector like-for-like sales have averaged zero since last October.

Although there have been a rash of earnings downgrades in the sector recently Dresdner expects more to come in the months ahead as demand slows. "Approximately 70 per cent of retail sector earnings changes have been downgrades in the last month and there are possibly more to come," the broker warned.

In the FTSE 100, which closed 4.5 points better at 4,947.4, Yell had another poor day. Shares in the directories group slumped 4 per cent, or 16.5p to 406.25p, as JP Morgan slashed its rating to "neutral" from "overweight" and suggested that the OFT's decision to refer Yell to the Competition Commission had destroyed any hopes of a more relaxed regulatory regime.

Corus shed 0.5p to 54p as Morgan Stanley warned that margins across the sector are likely to come under heavy pressure over the next 12 months because of high raw material costs and weakening steel prices. Hence, the US broker turned bearish on Corus.

Elsewhere, Bob Thian, the chairman of Whatman, tried to invigorate the healthcare group's share price after Tuesday's profits warning by acquiring £1m worth of stock at 239.5p. A couple of disappointing trading statements from the group have recently taken the shine off Mr Thian's near two-year tenure at Whatman, unchanged at 239p. Singer & Friedlander added 7p to 316.5p on whispers Kaupthing's offer for the merchant bank could value it at more than 350p a share. Intertek, up 2.5p to 770p, saw Bill Spencer, its chief executive, sell 3,000 shares at 756p.

East Surrey soared 10 per cent, or 43p to 475p, amid rumours that the water group has received a bid approach. The stock enjoyed strong demand from "hot money" players looking to make a quick buck throughout the day and closed at an all-time high. Analysts believe East Surrey would make a perfect acquisition for one of the many cash-rich private equity firms in the City.

Xansa improved 4.25p to 99p on news of a contract win for the IT outsourcer from the DIY chain B&Q. Also driving the stock higher were bullish comments from JP Morgan which began covering the company yesterday. The US broker slapped a 112p price target on Xansa. Babcock International gave up 2p to 143p as brokers struggled to clear a large seller from the market.

Eidos had a volatile session but finished 0.5p higher at 76.75p on hopes that Elevation, the US venture-capital house, may return with a higher cash offer for the computer games developer. As it stands, SCi Entertainment is most likely to win control of Eidos. Its £100m cash and shares bid has the backing of 40 per cent of Eidos' shareholder base. Meanwhile, Cranswick added 2.5p to 571p on talk of strong trading at the group's Perkins Food unit.