Market Report: Broker helps Cookson to engineer gains

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Investors bought into Cookson yesterday and the engineering group rose by almost 4 per cent amid hopes of some short-term strength in its share price.

UBS highlighted the opportunity, saying the prospect of improved conditions in the steel market was likely to underpin the stock over the third and the fourth quarters of the year. At the same time, it said the risk of a covenant breach was subsiding. On UBS's estimates, the group is likely reach a net debt to earnings before interest, taxes, depreciation, and amortisation (Ebitda) multiple of 3.1 times by December, thereby steering clear of a breach.

"While avoiding a covenant breach is by no means a foregone conclusion, we believe the probability of a breach is reducing," the broker said, explaining that the main risk was a setback in steel production in the fourth quarter. UBS maintained a "neutral" stance on the stock, but introduced a short-term "buy", given the likely upside from better conditions in the steel market. As a result, Cookson ended 14p higher at 373.7p.

Overall, early strength on Wall Street helped the FTSE 100 edge up past the 4,700-point barrier, with the benchmark rising by 45.42 points to 4,716.76 after the Bank of England published its quarterly inflation report. The mid-cap FTSE 250 index was 49.27 points ahead at 8,351.93.

Banks regained their composure, thanks in part to a strong start by US financial stocks. Lloyds was the strongest of the lot, advancing by 6.4 per cent, or 5.84p, to 96.83p, while the Royal Bank of Scotland strengthened by 5.4 per cent, or 2.3p, to 45.15p. Barclays was also strong, gaining 2.1 per cent or 7.1p to 353.35p. Elsewhere, Friends Provident was 4.1 per cent, or 3p, ahead at 76p, a day after it agreed to a revised proposal from Resolution, the investment vehicle owned by the tycoon Clive Cowdery. In the wider sector, Legal & General gained 3.7 per cent, or 2.3p, to close at 65.25p, while Prudential was up 2.5 per cent, or 11.6p, at 478.3p.

BG was also on a firm footing, strengthening by almost 5 per cent, or 48.5p, to 1033p following some words of support from ING, which moved the stock from "buy" to "hold" on grounds on valuation. "While we remain cautious of the second-half gas realisation pressure and ongoing weak gas demand globally, we have always believed in the long-term growth that BG offers, if not in the price investors should pay to access this," the broker said. It said the recent "reality check" in BG's share price meant the valuation now looked "fairer". Also on the upside, Morgan Stanley expressed a preference for J Sainsbury, up 3.6p at 318.1p, over WM Morrison Supermarkets, although it did raise its target price for the latter from 285p to 295p.

"We prefer the Sainsbury investment case, which we think offers just as much momentum, more downside protection, a better medium-term growth story and a much more exciting bull case, all for broadly similar multiples," the broker said, sticking to its "equal weight" stance. Morrisons ended 4.1p higher at 269.2p.

Bernstein was bullish about BAE Systems, which rose to 329.6p, up 3.5p, although the broker did scale back its target price for the stock to 380p from 410p, citing the impact of the revaluation of the group's unfunded pension liabilities. Despite the revaluation, Bernstein remained positive, highlighting the fact that BAE continued to trade below the average of its American peers on the basis of a pension-adjusted valuation. "When making this comparison we adjust the enterprise value by adding our estimate of the after-tax amount of the post-retirement liability that will be absorbed by shareholders," the broker explained, sticking to its "outperform" stance.

On the second tier, the recruiter Michael Page International failed make much headway, rising by 1p to 303.6p after Panmure Gordon reiterated its "sell" stance. It said that in light of Adecco's approach to Spring, "the potential for Page being acquired in the near term looks low". At the same time, with the group set to make an interim announcement next week, the trading outlook is likely to remain clouded and "cannot be anything but cautious".

"We note from Adecco's results [earlier this week] that pressure on rates remains intense, with no real green shoots of recovery coming through at this stage of the cycle, with ongoing restructuring required to drive any improvement in short term profitability," Panmure said. "We would expect the same guidance from Michael Page on Monday and do not expect it to call the bottom of the market just yet."

GKN fared better, rising by 2.7p to 109.6p, after Citigroup weighed in, raising its target price from 95p to 130p. The broker also made moderate upgrades to its estimates for the technology and engineering group, citing the fact that the company was showing "early benefits from stabilising vehicle production".

Further afield, Dana Petroleum closed 2.1 per cent, or 28p, firmer at 1394p, thanks to Deutsche Bank, which issued a "buy" note on the stock, lifting its target price to 1640p, compared to 1350p previously.