Market Report: Rolls-Royce's engines power through the clouds

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ROLLS-ROYCE broke through the clouds of gloom that enveloped the stock market yesterday, rising 4p to 190p in busy trading.

Henderson Crosthwaite, the securities house, fuelled the advance. The analyst Brian Newman described the group as a 'major recovery situation' and the premier British engineering investment.

He said the rationalisation programme had reduced manufacturing costs by pounds 200m a year, leaving annual production capacity little changed at 500 engines.

Profits this year are expected to climb pounds 44m to pounds 120m, hit pounds 180m next year and then reach pounds 250m.

Rolls represents one of the more disappointing privatisation issues. The shares were sold to investors in 1987 at 170p in two instalments. Last year there was a pounds 307m rights issue at 130p.

Mr Newman, who has been a Rolls fan for some time, descended on British Aerospace, the best-performing blue chip of last year, when it was deep in the doldrums.

The aero engines group is, with BAe, the subject of a Brussels wrangle. Mr Newman suggests that Rolls is an attractive investment for overseas funds but foreign shareholdings are already close to the 29.5 per cent ceiling permitted by the Government.

The ceiling is expected to be lifted shortly. It is widely believed that the Government wants to increase foreign participation to 49.5 per cent but stories circulate that officers of the European Union are campaigning to abolish the overseas restrictions altogether, a move that has not been kindly received in Whitehall.

The rest of the market ran out of steam after two heady sessions which, allowing for dividend payments, had lifted the FT-SE 100 index approaching 90 points.

A government stocks sell-off did much of the damage. As gilts wilted by up to pounds 13 4 at one time, the temptation to cream off some of the equity profits proved irresistible and the 100 index fell 24.5 points to 3,242.9. Gilts ended more than pounds 1 lower.

But the much more subdued atmosphere could not entirely eliminate the seemingly perennial speculation about interest rates.

The poor retail sales figures supported the argument that rates should be cut to compensate for next month's round of tax increases. And hopes are high that the Bundesbank will today reduce its rates, thereby increasing the pressure on the British authorities.

Schroders, kicked out of the 100 index, got its revenge and is already clamouring for readmittance.

The ordinary shares surged 80p to 1,170p and the non-voting 60p to 1,115p as profits came in comfortably ahead of expectations. Barclays de Zoete Wedd is looking for a 1,500p level by the end of the year.

Other merchant banks advanced in sympathy. Close Brothers rose 15p to 540p; Kleinwort Benson 16p to 548p and Hambros 14p to 378p.

P&O improved 8p to 689p on the proposed withdrawal of a rival ferry service and Eurotunnel steadied, up 3p at 544p.

Fisons, in a lacklustre drugs sector, edged ahead 3p to 134p, reflecting US interest and the inevitable talk of a predator.

Scotia Holdings, up 6p at 277p, was supported by a buy recommendation from UBS.

Cadbury Schweppes was another up 3p - to 499p - following a Hoare Govett profit upgrading, from pounds 470m to pounds 480m. United Biscuits, figures today, gained 5p to 338p. A big US write- off is expected.

Vodafone fell 14p to 557p, still smarting from Tuesday's UBS placing of 5.9 million shares at 564p.

Coats Viyella, firm recently, was threadbare, down 20p to 260p, despite a 38 per cent profits increase. Institutions were dismayed by its second enhanced scrip dividend.

Pentos, the struggling Dillons to Athena retail group, held at 38p. The market is braced for a distress rights issue. Specialeyes shaded 1p to 11p, despite reduced losses. In an agency cross 3.5 per cent of the shares went through at 10p.

Spandex gained 35p to 585p on a 22 per cent profit increase and the pounds 2.9m takeover of a French group supplying vinyls for screen printing.

Aminex, the Irish oil group that has attracted attention because of its Russian build-up, fell 5p to 70p. East West Oil has lifted its holding to 38.9 per cent.

Its increased stake stems from a 168,000 share placing at 79p and buying in the market. Oleg Popov, director general of the Russian government's oil operation, which owns 49 per cent of East West, has joined the Aminex board. He is the company's second Russian director.

Brown & Jackson, the hard- pressed Poundstretcher retailing group, made a token recovery, up 0.5p to 3.25p in brisk trading and the row at Andrews Sykes lifted the shares a further 3p to 93p.

Ransome, the lawn-mower group, fell 4p to 19p in response to losses of pounds 10.8m.

Midland Independent Newspapers, the Birmingham Post group, makes its debut today and with the offer seven times subscribed there are hopes the shares could reach 160p against the 140p sale price. Waste Recycling, headed by David Williams, the Mosaic Investments chief, also arrives. Here hopes are even more exotic, a price of more than 70p against the 50p placing price.

BCE Holdings, a distributor of snooker, billiard and pool equipment, is thought to be on the verge of buying three amusement arcades. It reduced its arcade operations last year by selling four centres. Suggestions that BCE plans a move into the hotel industry have also circulated. The company has only once achieved profits in the past five years. The shares held at 10.5p.

The FT-SE 100 index ended near its lowest of the day, down 24.5 points at 3,242.9. The FT-SE 250 index lost 12.1 points to 3,890.4. Turnover was 625.5 million shares with 30,376 deals. The account ends on 25 March with settlement on 5 April.

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