Market Report: Credit Suisse gloom bites into Premier Foods

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The Independent Online

It's been a bad few weeks for Premier Foods, the FTSE 250-listed food producer, whose shares were hit by worries about an emergency rights issue earlier this month.

Yesterday, less than a month after Shore Capital sparked a sell-off with a bearish note questioning the company's cash position, Credit Suisse, which slashed its price target for Premier's shares to 100p from 250p, drove another horde of investors out of the stock.

"When a PE slips below the yield, something isn't right," Credit Suisse analyst Charlie Mills wrote in a new note on the business. "Either the numbers are wrong, or the share price is.

"The debate, we believe, should centre not on the earnings at Premier Foods but rather the cash flow and capital structure," he added.

The note cast doubt on whether or not the company could cover the cost of its dividend and questioned the effect of the current high levels of debt. Credit Suisse also pointed out problems with the company's pension fund, and said that, "for starters, the dividend must surely be cut ..." The bank noted that an equity issue would be "hugely dilutive". It underlined the same problem with disposals.

Unsurprisingly, investors soon began to abandon the shares (again), and Premier's stock closed down 8.49 per cent, or 9p, at 97p.

The FTSE 100, although still shy of the 6,000 mark, had a healthy start to the week, closing up 111 points at 5,999.5. The benchmark was boosted by some banking sector bid speculation and by American hopes for Ambac, the ailing bond insurer, which was rumoured to be on the verge of receiving a significant capital injection. The FTSE 250 was also firm yesterday, closing up 224.3 at 10,275.3.

Alliance & Leicester was the feature of the day in the banking sector. The company was propelled to the top of the FTSE 100 leader board following weekend reports which suggested Lloyds TSB was considering making a bid for its business. Lloyds, which failed to acquire the now nationalised Northern Rock, is believed to be eyeing rivals weakened by the global credit crunch, and A&L is widely supposed to be at the top of the list of potential targets. The speculation helped A&L climb by 45p to 555p.

Royal Bank of Scotland also did well on the back of speculation that the Qatar Investment Authority was considering buying a stake in the company. Shares in the bank, which is due to publish its results on Thursday, rose 19p to 397p.

On the FTSE 250, Bradford & Bingley, the other bank touted as a likely takeover target for Lloyds, rose 6.2 per cent, despite some analysts' questions about its suitability. Unlike A&L, B&B is very much involved in the buy-to-let market. Lloyds has been more wary of buy-to-let and, therefore, the reasoning went, would fit better with A&L.

The detractors, while unable to stop the party, did manage to pull B&B down from an intra-day high of 208p to 200.25p, up 11.75p.

Charter, the London-based engineering group, topped the FTSE 250 leader board. The company won favour after its US peer Lincoln Electric published some positive results on Friday. Lincoln said it had witnessed good organic growth in Europe. This augurs well for Charter, which is due to publish its preliminary results on 13 March. Charter's shares climbed 85p to 868.5p.

On AIM, Sportingbet remained buoyant on the back of last week's rumours suggesting an impending, 70p-per-share bid from BWIN Interactive, the Austrian gaming firm which abandoned a round of takeover talks with the company last year. Sportingbet shares were at the top of the AIM-UK 50 index, up 4.25p to 47.25p.

Cape Lambert Iron Ore, rallied to second place on the AIM All-Share index, surging 37.8 per cent to 31p, after it signed a memorandum of understanding with China Metallurgical Group Corporation for the sale of its Cape Lambert iron ore project in Pilbara, western Australia. According to the terms of the MoU, the Chinese have put down a deposit of A$10m (£4.7m), which will be followed by a sale consideration of A$400m, payable in three tranches.

EiRx Therapeutics was less successful after the London Stock Exchange was notified that some trades in the company's shares, executed on (and possibly since) last Thursday may have been incorrect, and hence some of the volume reported may not be genuine. EiRx's shares closed down 0.005p, or 10 per cent, to 0.045p.

Also on AIM, the Terra Catalyst Fund, a new Cayman Islands-registered company established to invest in European-listed property funds, made its market debut yesterday. Terra's is the largest AIM IPO of the year so far, raising £116.3m in the institutional placing. Fairfax acted as the nominated adviser and broker, and Terra's shares, which were placed at 100p, gained 4p to close at 104p.

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