Market Report: Burberry trips up as bid hopes begin to unravel
Wednesday 06 October 2010
Burberry was out of fashion last night as Citigroup poured cold water on recent rumours of bid interest from private equity investors.
The luxury goods brand has enjoyed a strong run of late as traders bought in on hopes of deal activity. But Citi argued that the chatter made little sense. "We do not see much strategic and financial rationale for private equity money to enter so late in Burberry's transformation story," the broker said. It noted that management, led by the chief executive, Angela Ahrendts, had already rejuvenated the brand, overhauled the supply chain, cut costs and made advances in key markets such as China and Japan.
Beyond private equity, speculators have also mentioned the possibility of interest from conglomerates such as PPR and LVMH, but again, Citi said it struggled to see why either of the two would want to add another soft luxury brand to their portfolios. "We believe the short-term positive newsflow is largely priced in," the broker said. Citi moved the stock from "buy" to "hold", albeit with a target price revised upwards from 835p to 900p. The shares fell by 12p to 1,014p.
Overall, the markets were higher, though volumes remained thin. The FTSE 100 closed above the 5,600-mark, gaining 79.79 points to 5,635.76, while the FTSE 250 gained 118.15 points to 10,681.96 following some positive data about Britain's services sector and US business activity.
In terms of the day's movements, the miners were in focus, with metals prices rising against the backdrop of relative weakness in the US dollar. Kazakhmys failed to much make headway, however, closing broadly unchanged at 1,427p, up 4p, after its chairman, Vladimir Kim, sold nearly a third of his stake to the Kazakh government, triggering worries about increased state involvement.
Rio Tinto booked a 95p gain to close at 3,792p following Australianmedia reports that it was set to walk away from its planned iron ore venture with BHP Billiton. Rio was reported to have been swayed by shareholder pressure, improvement in its own finances and the view that the $116bn deal was weighted in favour of BHP, which fell 48p to 2,074.5p. After the close, Rio acknowledged that there were potential regulatory obstacles to the deal but said it had not taken a final decision. In the wider sector, Antofagasta rallied 45p to 1,269p as copper prices struck a new 26-month peak, while Xstrata rose 31p to 1,240p.
Investors in the travel and leisure sectors had a good day. TUI Travel, up 9.1p at 225.9p, issued a trading update, that cheered the market with news of encouraging holiday bookings for the winter and next summer. British Airways posted traffic figures that were driven up by increased demand for business and first-class travel. Aided up by the update, BA claimed pole position on the benchmark index and rallied by 15.5p to close last night's session at 254.6p.
Elsewhere, Invensys was 9.2p stronger at 307.2p after Citi upped the engineering group to "buy". The broker argued that concerns about the impact of government austerity moves on Invensys's key rail signalling business may be misguided. "Our analysis suggests a continued growth profile at rail and, when this is combined with recovery continuing across the rest of the portfolio, we see renewed attraction in the shares," Citi explained, raising its target price from 320p to 380p.
On a more speculative track, the rumour-mongers refused to let go of International Power, which was 3.4p ahead at 397.5p amid persistent bid talk. Earlier this year, France's GDF Suez tied up a deal to take control of International Power, and the chatter continued to focus on the possibility of a counter offer of as much as 450p per share.
Intercontinental Hotels ended the day 19p better off at 1,146p after analysts at JPMorgan Cazenove raised expectations ahead of the hospitality company's third-quarter results next month. The broker said recent data from the US suggested that "the hotel market recovery is continuing". "The midscale segment, which traditionally lags in a recovery, is catching up with the luxury and upscale segments which tend to lead," the broker said. It highlighted the positive read-across for IHG, where midscale offerings through the Holiday Inn and Holiday Inn Express brands account for the majority of its hotel rooms.
Hopes of recovery also underpinned the rest of the hotels sector, with IHG's peers Millennium & Copthorne gaining 2p to close at 520p, and Whitbread rising by 33p to 1,647p last night.
The home insurance group Homeserve was driven up by 17.1p to 459.1p after Credit Suisse weighed in, initiating coverage with an "outperform" view. "Homeserve provides a solution to the search for a reliable engineer to fix home emergencies at a reasonable price," the broker said. It noted that, on its estimates, continued growth in Homeserve's core UK market, coupled with strong expansion in the US and Europe, pointed to a five-year compounded annual growth rate of 16 per cent. "Homeserve offers one of the most compelling combinations of growth, profitability and value in Europe," Credit Suisse said, adopting a 720p target for the stock.
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