Market Report: Afren stands firm as the bargain-hunters move in
Friday 18 February 2011
Bargain-hunters switched into Afren, keeping the oil prospector on a firm footing while the wider market struggled to find direction last night.
The stock drew interest after two brokers – JP Morgan Cazenove and Morgan Stanley – recommended that investors take a second look. The latter gushed that Afren was the "cheapest stock" under its coverage, offering potential upside gains of as much 40 per cent.
"Afren now trades at an 8 per cent discount to core net asset values and is the cheapest oil exploration and production we cover," the broker said, helping Afren rise by 2.8p to 160.1p.
The wider sector was less successful, with Soco International and Heritage Oil easing by 0.3p to 342.5p and by 9.8p to 292.7p respectively despite a push by JP Morgan.
The broker also recommends Cairn Energy, which was 1.4p behind at 421.6p, despite JP Morgan playing down concerns regarding the regulatory clearance of its deal to sell control of its Indian assets to the miner Vedanta Resources.
Overall, the markets were flat, with the FTSE 100 closing at 6,087.38, up 2.11, and the FTSE 250 closing at 11,827.76, up 20.48. There was some concern about inflationary pressures in the US, with traders studying data showing a spike in core consumer prices. A separate report on unemployment further soured the mood, showing a larger than expected increase in initial claims for jobless benefits.
In Europe, dealing rooms were abuzz with rumours that Germany may be putting renewed pressure on Portugal to accept a bailout. The chatter was based on a local press report, which suggested that German authorities were pushing Lisbon to seek assistance ahead of any changes to the European Financial Stability Facility next month.
Back with the day movements, and the mining sector was pressured, moving lower as metals prices came off the boil. Copper moved away from the recent record high, touching a three-week low, as worries about inflation tempered the mood. Some were also concerned about the impact of high prices on demand.
"We have seen record highs... but you can clearly see that demand is cooling down a little on the current high prices. This is not just limited to copper but also for other base metals," Commerzbank's analyst Daniel Briesemann said.
Xstrata was among the weakest, shedding 37p to 1,440p as a result, while Kazakhmys fell by 33p to 1,505p and Eurasian Natural Resources Corporation lost 8p to 1,000p. Other losers included Vedanta Resources, down 45p at 2,400p, Anglo American, down 35p at 3,295.5p, and Antofagasta, 22p behind at 1,410p. On the upside, Royal Bank of Scotland was driven up by 1.8p to 49p after Evolution Securities weighed in, highlighting the read-across from the recent Barclays results.
"UK retail was performing better than expected... investment banking trends are also more resilient than expected and... the regulator might accept [a core tier one capital ration of 9 per cent]," the broker said. Though it disagreed with the final point, Evolution said "all three would be very positive for RBS".
Barclays itself was 1.5p better off at 333.55p, while Lloyds rose by 1.98p to 69.17p, thanks to support from Nomura. "We view Lloyds as offering the highest gearing to a recovery of traditional banking profitability in the UK, without the dilution from capital markets operations," the broker said.
On the second tier, Premier Foods was a broadly flat 28p, down 0.2p, after Evolution analysts revised their stance to "buy". Recent asset sales, and the company's success in securing credit ratings from the main agencies, meant that the group's balance sheet "looks to have been repaired at long last," the broker said.
Evolution also raised the prospect of a sale of Premier's troubled Brookes Avana own label ready-meal and cakes business, saying: "Should Greencore lose out to Boparan [in] the battle for Northern Foods, we think they would look at Brookes Avana, which supplies M&S... We think the disposal could generate around £80m to £100m of proceeds to accelerate Premier's deleveraging."
The housebuilder Redrow was 2.3p behind at 130.7p, despite posting a confident half-yearly report. Its sector peer Barratt Developments fared better, gaining 2.05p to 100.4p after Panmure Gordon said the stock was well placed to make gains: "Barratt is in significantly better shape now than it was going into the last downturn.
"The group has a relatively robust balance sheet, has improved its operating performance and reduced costs across the business. Despite this, the stock remains the most lowly valued housebuilder in the sector, trading on a 55 per cent discount to our forecast tangible net asset value per share. This fundamentally undervalues the business, in our view."
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