Market Report: Game trades higher on buy-back hopes

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The Independent Online

The prospect of buy-backs lured the punters into Game, the video games retailer, which rose with the wider market last night.

Goldman Sachs said that not only was the stock trading close to historical lows on a number of valuation metrics, but that investors may be rewarded with share buy-backs as the company considers ways to deploy the excess cash generated by the business.

There is no guarantee that Game will choose to deploy its capital in such a way, although a share buyback of £150m over the next 18 months, for example, would cheer shareholders while still leaving the group with around £75m of headroom on its existing debt facilities and a net debt to Ebitda ratio of less than one, on the broker's estimates.

"While it is possible that the payout ratio could be increased, or that the company may look to add stores more aggressively in markets where it remains sub-scale, we believe that the group will – between now and 2011 – generate sufficient excess cash to pay out an adequate dividend, continue its roll-out programme, and support a buyback programme," the broker said, reiterating its "conviction buy" stance on the stock, which closed 4.5p higher at 162p.

Overall, the FTSE 100 rallied by 2 per cent, or 101.95 points, to 5,256.1, hitting another high for the year. The FTSE 250 jumped to 9,541.33, up 1.6 per cent, or 152.5 points. The heavily weighted mining sector dominated the upside, thanks to firmer metals prices, optimism about Chinese demand, benign broker sentiment and positive production figures from Rio Tinto, which gained 150p, to 2,998p. Recovery hopes were bolstered by news that US retail sales declined by less than market expectations last month.

Kazakhmys, whose target price was raised to 1,466p from 1,380p at Morgan Stanley, led the way, advancing 9.4 per cent, or 111p, to 1,289p. Lonmin, up 6.3 per cent, or 104p, to 1,744p, has its target price upped by the broker to 1,340p from 1,071p. Vedanta Resources, up 7.7 per cent, or 171p, at 2,389p, was supported by both Morgan Stanley, which revised its target price for the stock to 3,112p from 2,623p, and by Citigroup, which upped its target to 2,300p from 1,460p.

"With Vedanta's stock trading at its current capacity value, the market prices in almost 'no value' for growth and cost reductions," Morgan Stanley said. "Confirmed growth plans over the next 24 months and further operational improvements could lead the share price to more than double without material changes to spot commodity prices, we think."

Elsewhere, upbeat results from JPMorgan had a positive read across the banking sector, with Barclays rising by more than 6 per cent, or 23.6p, to 383.6p. The Royal Bank of Scotland was 1.37p stronger at 48.33p, while HSBC advanced to 723p, up 18.9p. Standard Chartered was 27p heavier at 1,601p.

Further afield, Vodafone, up 1.75p at 135.45p, was helped on its way by Cazenove, which said the recent weakness in the telecoms group's shares presented a "buying opportunity", adding that recent concern about the Indian and US mobile markets had been "overdone".

"We expect Vodafone to report solid first-half results, consistent with recent trends and management's guidance. This should allow investors to focus on what remains a compelling valuation," Paul Howard, an analyst at Cazenove, said while reiterating his "outperform" stance.

On the downside, International Power, which yesterday said it had completed the sale of its interest in the Hartwell plant in Georgia, US, fell back to 276.2p, down 8.1p, after Morgan Stanley turned cautious on the stock, moving it to "equal weight" from "overweight" in a sector round-up.

Drax, which was also downgraded to "equal weight", was broadly unchanged at 469.9p, down 0.2p. National Grid, which was upped to "overweight", eased by 3p to 581p, while Scottish & Southern Energy, which remained "overweight", closed at 1,088p, down 12p.

"Of all the generators, Scottish & Southern remains our favourite as it has a much better balanced business than its peers, and we calculate that even in a weak commodity price environment there is little downside to consensus forecasts," the broker said, adding that it considered consensus "too bearish" on both the group's earnings growth prospects and its ability to create value from its wind farm investments.

Back on the upside, and the mid-cap baker Greggs gained 15p, to 450.3p, after Collins Stewart began covering the stock, telling clients to expect a positive outcome from the company's supply chain review, with Greggs likely to identify efficiencies as a result of the audit. "We conservatively include £5m of cost savings per annum from 2011 onwards in our forecasts," the broker said. "This implies a 100 basis point improvement to the operating margin between 2008 and 2011."

RBS analysts boosted sentiment around Aegis, the marketing group, which firmed up by 3p, to 116.7p, after the broker reiterated its "buy" recommendation with a revised 125p target price, compared with 110p previously.