Market Report: Aegis marked down for its European exposure

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The Independent Online

Aegis lost ground as the bulls, spooked by the marketing company's exposure to Europe, began to move out last night.

The stock, which went ex-dividend yesterday, closed 4p lower at 111p after Deutsche Bank highlighted the challenges presented by the group's poor exposure to the US market. Aegis derives an estimated 15 per cent of its profits from the American economy and about 70 per cent from Europe – a profile that may hamper management's efforts to re-establish Aegis's growth credentials in the near term Beyond that, it faces the "difficult long-term challenge" of growing margins amid increasing competition.

"Over the past 12 to 18 months, Aegis's organic revenues have lagged peers in both the media and research divisions," the broker said, switching its stance to "sell". "We assume that the new management prioritises a return to above-average revenue growth, although high European exposure may constrain the rate at which this happens. Emphasising top-line recovery is also likely to inhibit near-term margin upside."

Deutsche also weighed in on the French financier Vincent Bollore's stake in the company. Mr Bollore owns about 30 per cent of Aegis and 33 per cent of Havas, the French media group which he also chairs. His holdings have given rise to numerous rumours about the possibility of a bid from across the Channel, but Deutsche said such a takeover was unlikely within the next 12 months.

"Havas indicated in March that it has around €1.6bn of liquidity available," the broker said. "With an enterprise value of £1.7bn at the current share price, we believe Aegis remains out of reach, even if Bollore wanted to do the deal – unless, for example, Havas was prepared to contemplate a large equity raising."

Overall, the London market pared earlier losses as Wall Street notched up gains in early trading. As a result, the FTSE 100 recovered from a session low of 5,072.53 points to close at 5,151.32, down 11.98. The FTSE 250 fared better, ending 38.85 points higher at 9,660.38. Energy stocks tracked the commodity markets, with softer bids for base metals sapping the enthusiasm for mining shares. Anglo American was among the weakest of the lot, losing 56p to 2,591.5p, while Eurasian Natural Resources Corporation closed 9.5p lower at 988.5p.

Similar factors were at play around a number of oil issues, with US crude prices easing in response to worries about the pace of global manufacturing growth. BG was the weakest of the majors, losing 25.5p to 1,063p despite Bank of American-Merrill Lynch saying that it was least exposed the potential fallout from the oil spill in the Gulf of Mexico. BP was broadly flat at 429.75 as bargain-hunters moved in to capitalise on its recent losses.

Evolution Securities acknowledged that the recent drop in BP's share price seemed out of step with the likely clean-up costs and litigation connected to the Deepwater Horizon disaster, but said the shares were nonetheless likely to be dogged by uncertainty.

"Even if BP is wholly liable, the implication of the share price drop is that litigation costs could stack up to as much as $57bn to $64bn," the broker said. "We suspect this is out of line with the reality, but while uncertainty remains and the political mood is very hostile, buying BP's shares looks like an exercise in catching falling knives."

Over in the utilities sector, International Power rose by 4.6p to 295.9p after analysts at HSBC said that investors wary of the group's credit ratings or credit default swap spreads should instead focus on the recent corporate bond sale, which "demonstrates that raising debt presents no problem". "After its recent retreat to around 280p after several months in a 320p to 330p range, we believe the shares are attractively valued on our unchanged earnings estimates," the broker said, switching its stance from "neutral" to "overweight".

Lloyds and Royal Bank of Scotland fell by 1.52p to 55.89p and by 1.66p to 45.14p, respectively, as JPMorgan Cazenove ran the numbers on the potential impact of banking levies. "Given the strain on public finances, we believe the likelihood of a specific tax charge along the lines of a wholesale liability tax is high and could remove about 10 to 20 per cent of earnings, raising a much-needed £5bn to £10bn," the broker said, repeating its "underweight" view on the two state-backed lenders.

Elsewhere, the engineering group Cookson – whose share price fell by more than 15 per cent last month, rose by 6.7p to 459p after Citigroup said the stock had been "harshly treated" in the market sell-off. A recent meeting with Cookson's chief executive Nick Salmon and finance chief Mike Butterworth confirmed that the trading environment was positive, it added.

"Cookson management admitted that it has very limited visibility at one week to three months depending upon the product line. However, the very short visibility therefore provides direct confirmation that as yet the weakness in the financial markets is definitely not being translated into a weaker business environment," Citi added. It repeated its "buy" view and 750p target price for the stock.