Market Report: Bullish broker helps Rexam stand firm

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The Independent Online

Rexam overcame a weak market trend last night, firming up after a leading broker weighed in with some words of support. Credit Suisse said the consumer packaging company's stock stood to make gains as the economy strengthened, and switched its stance to "outperform" with a revised target price of 300p, up from 278p previously. The broker added Rexam, whose share price closed 6.4p higher at 231.5p, to its European Focus List, saying the shares were not only trading on attractive multiples but also offered limited downside risk.

Credit Suisse said Rexam's consensus earnings estimates had been scaled back to "depressed and realistic levels", while the company's end markets were stabilising. This, coupled with cost reductions, "should greatly reduce the risk of sequential earnings erosion in the second half of this year", it added. Furthermore, the broker added, the recent rights issue answered concerns about Rexam's balance sheet, while a return to economic growth should remove cyclical pressures bearing down the group.

"Reduced capital expenditure and an adjustment of the dividend policy to a sustainable payout with a [cover of two to 2.5 times] should see Rexam returning to solid cash generation and debt reduction throughout our forecast horizon," the broker said. "In a scenario with the economy returning to trend growth, we see Rexam delivering normalised earnings of 37.1p by 2012."

Overall, the market was relatively quiet with the FTSE 100 closing down only 9.36 points at 4722.2. The mid cap FTSE 250 was similarly unmoved by the day's activity, edging 0.45 points lower to 8421.01. Despite the lack of action, Tim Hughes, the head of sales trading at IG Index, said the markets were still on a firm footing, adding: "As investors continued to weigh up the wider economic picture, gains for equities may slow down but most traders seem willing to hold long positions at the moment and the markets seem fairly stable for the time being."

Banks lagged behind last night, with Lloyds – down 4 per cent, or 4.11p, at 97.89p, falling back amid speculation that it might tap shareholders for cash in an attempt to limit the cost of its participation in the Government's Asset Protection Scheme and in turn, limit the taxpayer's stake. In response, analysts at Panmure Gordon noted that, while market conditions for a rights issue had improved, much hinged on the trend of impairments. Such a move would "imply more dilution than the conversion of the government 'B' shares, and less protection if impairments have not peaked', they said. "For non-government shareholders, the prospect of say, a £15bn, seven-for-nine rights issue at 70p (a 31 per cent discount to last Friday's close), would imply more dilution than the eventual conversion of the APS-related Government 'B' shares at 115p."

Among the other lenders, Royal Bank of Scotland was 3.6 per cent, or 1.68p, weaker at 45.31p after Nomura said it remained "negative on RBS" and reiterated its "reduce" stance. Barclays, down 1.8 per cent, or 6.45p, at 358.55p, was also weak.

Elsewhere, Tullow Oil, up 15p at 1008p, made some headway after Morgan Stanley underlined its positive take on the company. In a sector review, the broker also recommended the FTSE 250-listed Dana Petroleum, which was 8p higher at 1379p, and Afren, the AIM-listed explorer, which closed flat at 57.75p.

Also on the upside, the telecoms group BT, which gained 2.6p to close at 134.05p, was boosted by analysts at JP Morgan, who raised the stock to "overweight", with a revised target price of 175p, up from 110p before.

"Broadband and cost-cutting are taking centre stage from global IT growth, in our view adding visibility to the BT story," the broker said, highlighting what it termed the BT stock's "substantial upside potential".

On the downside, the mining industry was unsettled as investors banked profits. For Vedanta Resources, down nearly 2 per cent, or 35p, at 1790p, the trend dampened the effect of words of support from Deutsche Bank, which said the group was well placed to make the most of growth in India.

On the second tier, Ashtead fell back by 1.05p to 74.25p after Numis's experts stressed their "sell" stance on shares in the equipment rental group, which operates mainly in the US and Britain under the brand names Sunbelt Rentals and A-Plant.

"The industry is late cycle due to its dependence on the construction industry," the broker said. "US new-build appears to be at the bottom of the cycle and the US government's stimulus package should help offset private commercial weakness. However, we do not see a pick up in Ashtead's earnings until 2011-12."

Among smaller companies, Worldspreads stood firm, closing flat at 61p, after the financial spread betting group unveiled plans to sell its Irish business, prompting Collins Stewart to re-state its "buy" stance. "Given Worldspreads's ability to grow market share in the UK and capture new/emerging markets with its highly efficient platform and services, we see this growth as far more visible and sustainable than the more mature Irish position," the broker said, sticking to its 125p target price on the company's stock.