Market Report: Pleasant surprise in store at Morrison

Is Morrison's conversion of Safeway stores going rather well? Traders were intrigued yesterday by a note from analysts at JP Morgan who had investigated four newly converted Safeway stores for themselves.

Is Morrison's conversion of Safeway stores going rather well? Traders were intrigued yesterday by a note from analysts at JP Morgan who had investigated four newly converted Safeway stores for themselves.

Shares in Wm Morrison gained 4p to 197.5p as the JP Morgan boys reported that "we were encouraged about the state of the converted stores and early performance they are achieving".

The stores, in Peterborough, Corby, Milton Keynes and High Wycombe, had all seen sharp increases in sales after conversion to the Morrison's format in recent weeks. The Peterborough store saw a whopping 65 to 70 per cent surge, while Corby was 35 to 40 per cent better and Milton Keynes, one of Safeway's "megastores", had experienced an uplift of more than 20 per cent. At High Wycombe, 30 to 35 per cent more customers had been through the doors.

Ever since Morrison's announced last year that it would bid for Safeway, investors have worried about the integration risks. That view seemed to be vindicated after Morrison's was forced to issue its first-ever profits warning in July this year, just months after the takeover completed.

So intelligence on how store conversions are going will be seized upon by investors. The company will provide an update on the issue with its interim results next month. If what JP Morgan analysts saw turns out to be the norm, there ought to be considerable upside in the shares, traders said.

The brokerage found "the stores visited seemed all to be trading at least in line with budget". It added: "The sales performance was better than we had expected. There did not seem to be major logistics problems and employee satisfaction was also high, which seems natural as the stores were trading well."

Still in the supermarket sector, Citigroup felt moved to try to knock down any remaining hopes of a bid for Sainsbury, 3.75p lower at 279.25. The end of last week saw renewed speculation of a bid, with hefty trading in the retailer's shares. Possible names for the predator have included Target, a US group.

The Citigroup note pointed out that Target seemed to have ruled itself out, while Wal-Mart would have obvious competition problems. The broker reiterated its sell in Sainsbury, saying a bid was unlikely, while "the fundamentals are worse than ever".

There was talk that a bid for Big Food Group - 1.25p better at 88.75p - from Baugur was now more likely after the Icelanders announced they had sold out of House of Fraser, 9.25p worse at 117.75p. Baugur already owns a 22 per cent stake in Big Food Group.

The wider market was broadly in positive mood, with media stocks in particular doing well. The FTSE 100 index closed up 13.5 at 4558.5, with AstraZeneca, which lost 110p to 2340p, proving the major drag. The drugs giant took 7.6 points off the benchmark. Risers outnumbered fallers by nearly three to one. Bid rumours continued to swirl around the engineering and construction group Amec, 2p up at 321p. This story has been running for a while but some insisted the company had turned down an offer pitched at 380p a share. The most likely buyer is the US company Fluor. It was said that Fluor management had been over to talk to Amec shareholders, though others said this was simply being put about by those who have found themselves long of the stock.

Media shares were buoyed by WPP's purchase of Grey Global as well as some positive research notes. ITV was 3.75p better at 106.75p, helped by a positive Citigroup note from the end of last week, which upped its price target and said the valuation was "compelling" despite the poor trends on the audience front.

Dealers also continued to speculate that ITV was about to make its move for SMG, 5p better at 104p. SMG owns two ITV licences. Charles Allen, ITV's chief executive, recently restated his view that acquiring those licences made sense "at the right price". Whether this would involve a bid for the whole group remains unclear.

Other good performers in the media sector included Emap, 17p higher at 791.5p; EMI, 4.25p better at 217.75p; Pearson, 14p up at 637.5p; and Reuters, 13p better at 348.5.

In the leisure sector, the cigarette maker Gallaher lost 12p to 631p after it suffered two downgrades. ABN Amro cited slower growth than its rivals and a reduced chance of a takeover. Lehman Brothers also had valuation concerns with Gallaher, though it was more positive on other stocks, upgrading Imperial Tobacco, which still closed down 12p at 1188p. Lehman said the tobacco sector would gain from price-driven organic growth, less capital expenditure and fewer restructuring charges.

On the booze front, Scottish & Newcastle was 11.5p better at 399.5p after CSFB highlighted strong figures on Friday from the company's Russian beer joint venture Baltika. The broker said this should offset weaker western European trading.

Market Movers

↑ Colt Telecom 49.25p (up 4.5p, 10.1 per cent). A management reshuffle, which should help knock the company into shape, adds to the recovery hopes.

↑ Corus 50.75p (up 2.25p, 4.6 per cent). Heavy volumes of 57 million. Improved sentiment that it is on track to report good numbers on Thursday.

↑ BAE Systems 219p (up 3.5p, 1.6 per cent). Acquires American IT group that is leading supplier to the Pentagon.

↑ Yoomedia 26p (up 5.75p, 28.4 per cent). Its Broadband TV joint venture is to trial a new interactive system in the NTL platform.

↑ Lonrho Africa 10.25p (up 1.25p, 13.9 per cent). Completes disposal of Kenyan interest Ol Pejeta Ranching for £8.2m.

↑ Compass Group 238.75p (up 8.25p, 3.6 per cent). Recovering from profits warning last week.

↑ CSR 375p (up 20p, 4.6 per cent). Rally in tech sector.

↑ Silentpoint 9.25p (up 0.75p, 8.8 per cent). Chairman Haresh Kanabar buys 25,000 shares.

↑ St Ives 373p (up 13p, 3.6 per cent). Makes "complementary" acquisition of SP Group, a supplier of point-of-sale material to brands and retailers.

↓ Millwall 0.14p (down 0.01p, 6.7 per cent). Lost 2-0 to Ipswich Town at the weekend.

↓ Abbey National 608.25p (down 10.75p, 1.7 per cent). Lack of new news on takeover.

↓ BAA 559.5p (down 2p, 0.4 per cent), Profit-taking after Friday's travel figures, buys Heathrow warehouse site.

↓ Topps Tiles 179.25p (down 4.75p, 2.6 per cent). Co-chairman offloaded 6.5 million shares on Friday.

↓ Matalan 223.75p (down 4.25p, 1.9 per cent). Bid hopes fade.

↓ Moneybox 27 (down 12.5p, 31.7 per cent). Warns on full-year results after interim loss widens.

↓ Air Music & Media 8.75p (down 1.25p, 12.5 per cent). Acquires Redworth, a supplier of CDs, cassettes, DVDs and videos, for £27.6m.

↓ Tullow Oil 127.25p (down 2.5p, 1.9 per cent). Interim results received mixed reception. Profit falls well short of top-of-forecast range.