Market Report: Centrica flares higher on payout hopes

Earnings hopes supported Centrica as the FTSE 100, hit by another round of weakness in the mining sector, traded lower last night.

The British Gas-owner saw its shares rise by 4.7p to 294.7p after analysts at Nomura, returning from the company's capital markets day last week, raised their earnings estimates for 2012 by 5 per cent, putting themselves some 10 per cent above consensus for each of the next three years. The broker said that, not only was Centrica, which is already the largest energy provider in the UK, well placed to grow its downstream businesses, but also its balance sheet was among the best in the sector. This raises the prospect of higher payouts, Nomura explained, repeating its "buy" stance.

"We have adjusted our dividend per share forecasts to match superior growth in earnings per share and now expect Centrica to grow dividends by 10 per cent in each of the next three years," the broker said, revising its target for the stock to 370p from 340p.

"Our new estimates ... reinforce our view that Centrica remains the best quality growth opportunity within the European utilities space."

Overall, the FTSE 100 fell below the 5600-point mark, losing 31.80 points to 5593.85, while the mid-cap FTSE 250 index fell to 9879.01, down 62.55 points, as the miners lost ground. Commodity markets softened as fears of Chinese monetary tightening came back to the fore, with traders citing renewed concern about higher inflation. Antofagasta, down 32p at 1001p, was among the weakest, while Fresnillo lost 26p to 820p and Xstrata fell to 1157p, down 36p. Kazakhmys was 1473p, down 44p, while Lonmin fell 33p to 1965p.

Like Centrica, a burst of benign broker sentiment helped BT to firm despite the weak market trend, with the telecoms group adding 1.4p to 124.7p after Citigroup revised its view to "buy". Calling the post-results share price slide "overdone", Citi said the pension risk was more than reflected in the stock, while the company was well placed to benefit from incentives to upgrade local network infrastructure, no matter who ends up winning the upcoming election.

Also on the upside, the Royal Bank of Scotland firmed 0.16p to 42.73p, despite the analysts at Seymour Pierce initiating coverage with a "sell" stance. The broker was also negative on Barclays, which was 3.25p behind at 348.6p, and Lloyds, which fell 0.9p to 57.57p. Seymour said market hopes of banking income growth were "far too optimistic", noting: "UK banks have now been recapitalised, new money (some of it belonging to the taxpayer) flowing into old business models. Company results presentations are full of familiar faces asking questions about 'growth'. Not much, in short, has changed."

Elsewhere, British Sky Broadcasting, which last week was the focus of rumours suggesting that Rupert Murdoch's News Corp may offer up to 750p for the shares it does not already own in the pay-TV provider, fell back as traders banked profits from Friday's speculative run. The stock, which lost 14p to 584p, was also the subject of some cautious comment from Evolution, which revised its view to "reduce" on valuation grounds, while Citigroup moved it on to its most preferred list of telecoms and media stocks, replacing Pearson, the Financial Times publisher which was flat at 998p.

Evolution also weighed in on the bid rumours, saying that while the recent weakness in the pound had made a BSkyB buy-in more affordable for News Corp, assuming that any deal were for cash, such a move "would leave it very stretched" and with a capital structure more in keeping with the pre-Lehman Brothers boom. "We also think it would be strange timing for News Corp, given the impending decision from Ofcom on pay-TV regulation," the broker added.

Further afield, Panmure Gordon boosted BBA Aviation, which rose by 2.2p to 188.6p after the broker raised its target price for the aircraft services group's shares to 210p from 190p, citing the upside related to the repair of the company's balance sheet. Panmure said it expected BBA's ratio of net debt to earnings before interest, tax, depreciation and amortisation to fall from 2.8 times in 2009 to 2.3 times in 2010, and then down to 1.7 times in 2011. "After a painful lesson spanning four years, we do not expect it to re-entertain high levels of leverage and financial complexity," Panmure said.

The wireless chip maker CSR was under pressure, retreating 19.1p to 465.2p after UBS said the stock was approaching fair value levels. While raising its target to 540p from 495p to reflect recent foreign exchange moves, the broker abandoned its "buy" stance, moving to "neutral" on the back of recent shares price gains.

UBS also turned "neutral" on the chip designer ARM, which was 4.7p behind at 222.5p. "While we maintain our view that ARM remains one of the best companies in the sector based on secular trends, at the current level, we believe [it] needs to grow into its multiples," the broker said, revising its target for the stock to 240p. Once again, the rise in the target price was down to currency factors, with UBS pointing out that ARM was one of the main beneficiaries of sterling weakness.