Market Report: British Land sunk by Goldman warning

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The Independent Online

The prospect of dilutive disposals sent British Land sliding to 431p, down 3.15 per cent or 14p, last night. Goldman Sachs warned that, given the rapid deterioration in the domestic economic picture, the company's high level of gearing meant that it may have to embark on a large disposals programme – possibly close to the largest by value in its peer group – to return to its long-term average leverage ratio.

While certain long-lease assets may prove attractive in the current investment market, the process is likely to be "significantly dilutive" to earnings, according to the broker, potentially leading to a 33 per cent reduction in dividends in the year to the end of March 2010.

"British Land's exposure to more cyclical asset classes – particularly City offices – is likely to lead to further significant valuation falls, particularly as rental values begin to show sharper declines," Goldman said, adding the stock to its "conviction sell" list.

For real estate investment trusts as a whole, the broker has factored £15bn of disposals at discounts of up to 10 per cent to trough valuations into its forecasts for 2010, saying: "There are alternative options of rights issues and renegotiation of covenant terms, although both are likely to be at least as dilutive to new investors."

Overall, it was a relatively quiet session, with the FTSE 100 easing 14.6 points to 4,194.41 and the FTSE 250 gaining 2.35 points to 6,258.57.

Wolseley, the construction materials group which posted a worse than feared trading update this week, was the weakest on the benchmark index, slumping 10.45 per cent, or 21p, to 180p, as analysts highlighted the growing likelihood of a rights issue. Exane BNP Paribas told clients that, in light of rising debt levels and the falling share price, an announcement could be forthcoming soon, while Royal Bank of Scotland lamented the fact that the company had not moved on the issue already.

"The group's reluctance to move quickly and its lack of clarity in the trading update have left [it] exposed to further selling pressure," RBS said.

"The group needs to generate significant cash flow in January to avoid breaching its covenants. We assume the group (somehow) delivers cash flow for the test data at 31 January 2009 but believe that a breach is avoidable looking to 31 July 2009, with [the] net debt to [earnings multiple] forecast at 4.5 times."

Experian swung up 4.35 per cent, or 17.5p, to 419.5p, after UBS moved the credit information provider's stock to "buy", labelling it the earliest cyclical play in the support services sector.

"We remain cautious on macro prospects, but have been positively surprised by the resilience of Experian's activities in recent months," analyst Jamie Brandwood said.

"Despite exposure to banks and high fixed costs, organic sales growth has stayed positive and margins steady where other sector cyclicals have seen organic sales declines and margin pressure."

The banking rally continued, with Barclays, which sparked this week's recovery, climbing 1.47 per cent, or 1.3p, to 90p, despite UBS pointing out that while the stock was not expensive on the basis of normalised earnings, "the level of leverage, continued exposure to market volatility and [the] risk of more onerous regulatory requirements for trading books continue to mitigate against the stock". HSBC missed out, however, shedding 1.8 per cent, or 9.75p, to 531.25p as rumours of a possible rights issue resurfaced.

Elsewhere, the pubs group Enterprise Inns surged ahead amid speculation that the Government may bow to industry calls and halt planned increases in beer duty. The hopes were said to be behind signs of short covering in the stock, which ended 16.4 per cent, or 6p, higher at 42.5p.

The mezzanine finance provider Intermediate Capital, on the other hand, slumped to the bottom of the mid-cap index, shedding 27.9 per cent, or 160.5p, to 414p after it warned that second-half core income was expected to fall behind the level achieved in the first half.

Among smaller companies, the biotech group Oxford Biomedica was depressed, retreating to 6.4p, down 14.7 per cent or 1.1p, following news that Bavarian Nordic had re-filed a patent infringement suit alleging that TroVax, the British company's ther-apeutic cancer vaccine, infringed Bavarian's US patents.

Oxford Biomedica said that the case was "without merit", with senior vice president Peter Nolan adding that Bavar-ian had not brought any new evidence to support the claims, which he characterised as "a re-statement of the arguments that the court has already rejected".

Polo Resources traded up, adding 21.7 per cent, or 0.63p, to close at 3.5p, after announcing a Mongolian coal and mineral joint venture with Peabody Energy Corporation.

News of the venture follows an unsolicited bid approach from Denham Commodity Partners Fund, which Polo Resources said undervalued its assets.

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