Market Report: Bunzl eases as Footsie rounds off strong week

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The Independent Online

Bunzl fell back despite a firm market trend last night, after analysts at Bank of America Merrill Lynch switched their stance on the stock to "neutral" from "buy".

The distribution group's stock has underperformed the business services sector and the wider market in recent months, a fact which Merrill attributes to, first, sector rotation out of defensives and into cyclical stocks, and, second, worries about possible downgrades to estimates. Both themes, the broker said, could run further, and in turn continue to undermine the stock. On the upside, the current undemanding valuation should provide a floor for the share price, which eased to 525p, down 2.5 per cent or 13.5p.

"Our previous positive investment thesis was based upon [the group's] defensive growth characteristics and the belief that margins were in an upward trend. In particular, that it had the potential to double the size of the business through a combination of organic and acquisition growth," Merrill said.

"Our analysis now indicates that volume growth could be structurally lower than past levels, pricing should be under pressure and that it is unable to make a material impact to earnings per shares estimates through acquisition funded growth until 2011."

Overall, the FTSE 100 was 26.91 points stronger at 4388.75p, while the mid-cap FTSE 250 index gained 26.55 points to 7580.66. Last night's gains rounded of the benchmark's strongest week so far this year, and one of its 10 best on record.

The mining sector led the way last night, as leading stocks recovered from Thursday's bout of profit-taking, with the Eurasian Natural Resources Corporation, which was among the worst performers in the session before, rising to pole position on the Footsie, up almost 6 per cent or 41.5p at 762p. Xstrata, which advanced to 691.9p, up more than 4 per cent or 28.4p, was just behind, while Vedanta Resources, which was reported to be talking to potential partners about a foray into steel production, climbed to 1502p, up 4.2 per cent or 61p. Kazakhmys was also firm, advancing by 1.6 per cent or 11p stronger to 685.5p.

Anglo American was 2.7 per cent or 48p ahead at 1807p as traders awaited Xstrata's next move. Citigroup, which weighed in on the issue, said it expected a stand alone Xstrata to outperform Anglo, owing to its commodity mix, project growth and an improving cost base.

Further afield, BG was 1.7 per cent or 17p higher at 1045p, thanks in part to Goldman Sachs, which switched its stance on the stock to "buy" from "neutral" in a sector review, saying that the second quarter was likely to mark the trough of the current cycle for the integrated players.

"This is due to weak refining, spot and long term gas pricing and normal seasonality," the broker said. "We believe that the third quarter and the fourth quarter will see a pick-up in earnings that will continue into 2010."

Besides BG, Goldman also recommended Royal Dutch Shell, which was just under a per cent or 13p firmer at 1536p.

In the wider oil & gas space, the exploration and production group Tullow Oil strengthened to 952p, up 2.8 per cent or 25.5p, following some words of support from Panmure Gordon, which began covering the stock with a "buy" rating and a 1150p target price.

"We believe that the shares have asset backing of 740p per share based on a DCF [discounted cash flow] analysis, on the proven and probable reserves, of its oil and gas fields and discoveries," the broker said.

"However, the group is embarking on a major exploration and appraisal programme over the next 12 months, which could take this over 2000p per share. Even assuming a success rate of 30 per cent, it would take the asset value to 1150p."

Elsewhere, Friends Provident, down 0.5p at 71.5p, set out terms for merger talks with Resolution, only days after rejecting an approach from the financial services tycoon Clive Cowdery's investment vehicle.

Under the proposal, Friends would become the holding company for the combined group, with Resolution shareholders swapping their existing shares for new shares in Friends Provident.

On the second tier, Aegis was 3.1 per cent or 2.75p lighter at 84.75p after Exane BNP Paribas moved its recommendation on the stock to "neutral" from "outperform". "One year after the CEO's departure, the strategic direction of Aegis remains unclear," the broker said. "While we credit the chairman (also interim CEO) for having taken early cost-cutting action, a replacement for the CEO has yet to be named and the announced departure of the current CFO after just over two years in office is not reassuring, in our view."

Among smaller companies, JJB Sports eased to 27.25p, down 2.7 per cent or 0.75p, after Altium Securities moved its recommendation on the stock to "sell" from "hold". The Bill & Melinda Gates Foundation Trust, which revealed a 3.14 stake in the company on Thursday, appeared more confident, revealing after close last night that it had upped its holding to 4.08 per cent.

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