Market Report: Bid talk helps Home Retail avoid the slump
Tuesday 09 August 2011
The markets' severe plunge may have shown few signs of abating yesterday, but the return of talk that its Argos business could attract buyers meant Home Retail was one of the few stocks finishing ahead.
As the FTSE 100 suffered a fourth straight session of three-digit falls for the first time ever, the retailer – which also owns Homebase – managed to power forwards 3.9p to 123.7p on the mid-tier index after Morgan Stanley talked up its takeover potential.
Pointing out the company has lost over 75 per cent of its share price since peaking at 497.5p in 2007, the broker's analyst Geoff Ruddell said that "given how lowly Argos and Homebase are currently being valued by the market, we think some form of takeout remains a very plausible scenario".
Bid rumours have often appeared around the group, with one frequent tale linking it to a potential approach from Walmart. Mr Ruddell suggested Argos would "strategically, be a very attractive asset" for the US owner of Asda, as it would, he said, to the other UK supermarket chains.
Highlighting the fact the broker was "turning buyers for the first time ever," Mr Ruddell upgraded Home Retail's rating to "overweight", saying that "both Argos and Homebase remain viable businesses and are far from worthless, which is what [its] current share price is very close to implying". The analyst added that the strong condition of its balance sheet meant it was in a better condition than a number of its rivals to wait out the current economic pressures facing the high street.
After Standard & Poor's decision late on Friday night to rid the US of its AAA credit rating, investors suffered a nervous weekend as they worried over whether the move was going to prompt a seventh straight session on the slide for the blue-chip index. Despite a small climb in initial trading, by the bell – with the Dow Jones Industrial Average in the US down nearly 3 per cent – the FTSE 100 had been driven back 178.04 points to 5,068.95; its lowest closing level for 13 months.
Once again, the miners were taking the brunt of the damage, including Rio Tinto, which dropped 234.5p to 3,387.5p, after it announced overnight that it was teaming up with Japan's Mitsubishi to make a $1.56bn move for the Australian miner Coal & Allied.
Yet, as gold prices soared above the $1,700-an-ounce level for the first time, the precious metal producers were benefiting from their defensive appeal. Randgold Resources ended up finishing at the only riser on the top-tier index, putting on 425p to 6,145p, as Deutsche Bank said its recent figures "will go some way to restore market confidence in [its] ability to convert exploration success into sales".
The broker upgraded its rating to "buy" and also increased its target price for Fresnillo – down 20p to 1,804p – to 2,000p from 1,480p.
After a week in which it revealed it had lost £3.25bn over the first half of the year and its share price retreated nearly 25 per cent to its lowest since 2009, for most of the day Lloyds Banking Group looked as if it was going to close in the blue for the first time in seven sessions.
However, a late slump meant at the close it was behind just 0.04p to 32.81p, while – despite the European Central Bank kicking off its plan to buy Italian and Spanish bonds and Nomura changing its rating to "neutral" from "sell" – Royal Bank of Scotland was knocked back 0.92p to 27.26p.
After dropping 451.16 points to 9,861.97, the FTSE 250 was at its weakest for almost 12 months, but City scribblers still said IG Group should be celebrating the recent turmoil. Pointing out that last year the spreadbetter's profits were dampened by fairly calm markets, Nomura's James Hamilton said that "if current market conditions persist... into the much busier month of September and beyond we would expect to see consistent upgrades as the year progresses."
Given the current fears over the state of the US economy, it was not too surprising that Ashtead – which has a significant presence Stateside with its Sunbelt Rentals business – lost 25 per cent last week.
Yesterday the equipment rental group plummeted a further 13.5p to 107p, despite Seymour Pierce attempting to halt the fall by highlighting the positive read-across from its US peers.
Both United Rentals and RSC have issued reassuring comments recently, prompting the broker to say that "notwithstanding the current concerns over the US economic outlook, we continue to believe we are in the expansion phase of the cycle for equipment rental companies".
Down among the small-cap stocks, International Ferro Metals managed to buck the general trend by shifting up 1.75p to 16p – an increase of over 12 per cent. The ferrochrome producer, which had dropped by more than a quarter over the previous four sessions, rose after announcing it had managed to complete a key upgrade at its Sky Chrome project in South Africa both on budget and on time.
FTSE 100 Risers
Tesco 361.9p (down 0.5p, 0.14 per cent)
Supermarket outperforms the market thanks to its defensive qualities.
Standard Life 172p (down 0.9p, 0.52 per cent)
Insurer is among the top stocks ahead of the release today of its third-quarter results.
International Power 286.3p (down 2.2p, 0.76 per cent)
Utility manages to limit its losses after signing Canadian wind power deal.
FTSE 100 Fallers
Vedanta Resources 1,287p (down 132p, 9.3 per cent)
Miner drops after subsidiary buys 51 per cent stake in Liberia's Western Cluster for $90m.
Amec 834p (down 66p, 7.33 per cent)
Oil services group slides despite Seymour Pierce upgrading its rating to "buy" from "add".
Tullow Oil 951.5p (down 60.5p, 5.98 per cent)
Energy company knocked by Deutsche Bank reducing its target price to 1,150p from 1,405p.
FTSE 250 Risers
Premier Foods 13.77p (up 0.81p, 6.25 per cent)
Hovis owner sees a bounce after dropping on Friday in the wake of its interim results.
Centamin Egypt 91p (up 1.35p, 1.51 per cent)
Gold miner finds support from the price of the yellow metal rising.
Cable & Wireless Communications 32.25p (up 0.3p, 0.94 per cent)
Telecoms group rises for the first time in seven sessions.
FTSE 250 Fallers
Thomas Cook 45.51p (down 8.59p, 15.88 per cent)
Troubled tour operator takes the wooden spoon, stretching its losing run to an eleventh day.
Lamprell 285p (down 47p, 14.16 per cent)
Oil rig company's latest fall means it drops to its lowest share price since last March.
Misys 249.2p (down 31.1p, 11.1 per cent)
Software group still retreating after the takeover attempt from FIS fell apart last week.
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