Market Report: Goldman warns on British Land disposals

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The Independent Online

British Land traded lower last night after City analysts warned that the commercial property group’s £740m rights issue may not be enough to shore up the balance sheet.

Assuming the company refrains from exploiting its unused debt facilities to finance acquisitions before the property market troughs, the rights issue should remove the risk of a covenant breach, according to Goldman Sachs. But in order to limit its loan-to-value ratio to 52 per cent, the broker said the group needs to make “another £1.5bn of disposals”, which in turn will lead to further dilution.

“While management will rightly not want to de-lever too far at the trough of the cycle, we believe a lower target loan-to-value range than the historic 44 per cent to 55 per cent seems likely,” Goldman said, reiterating its “sell” rating on the stock. The assessment sent British Land tumbling to 399p, down 5 per cent, or 21p.

The wider commercial property sector traded lower with the market, with Hammerson losing almost 6 per cent, or 20.2p, to 319.75p and Land Securities retreating to 511p, down 7.51 per cent, or 41.5p.

Overall, the FTSE 100 closed below the 4,000-point barrier for the first time since November, losing 3.22 per cent, or 129.31 points, to 3,889.06. The FTSE 250 was also weak, losing 3.36 per cent, or 209.04 points, to 6,008.82.

Traders were unsettled by heavy losses on Wall Street, where weak financials dragged leading indices to record lows.

“It has been a shocking week on both sides of the Atlantic, with the Dow Jones Industrial Average touching six-year lows on fears that there will need to be a widespread nationalisation of the US banking sector,” Mark Priest, a senior trader at ETX Capital, said, adding: “It’s a bad time for those of a nervous disposition.”

British banks were predictably unsettled by the losses on the other side of the Atlantic, with the Royal Bank of Scotland losing more than 11 per cent, or 2.5p, to 19.3p. Barclays was down 5.84 per cent, or 5.9p, at 95.2p while Standard Chartered – the target price for which was cut to 800p from 963p at S&P Equity Research – fell to 655p, down 5.07 per cent, or 35p.

The mining sector was the biggest drag, however, with traders increasingly concerned about the fate of profits as the world demand for commodities tracks the deterioration in key economies. Anglo American was the weakest over here, almost 17 per cent, or 209p, behind at 1,027p, after posting a disappointing set of final results, telling investors it was scrapping its dividend and shedding 19,000 staff as it attempts to deal with the global economic downturn. The news unsettled the wider mining sector, which also had to deal with weaker metals prices. Xstrata slumped to 643.5p, down more than 10 per cent, or 76p, while Kazakhmys was down 9.7 per cent, or 27.7p at 257p.

Cazenove kept Anglo American at “in-line”, saying that although the dividend cut may be a surprise to some, “it is likely to prove a sensible move should commodity prices weaken further”. Rio Tinto, whose fund raising deal with China’s Chinalco remains mired in controversy, was 9.5 per cent, or 190p, weaker at 1810p.

Elsewhere, the Lloyd’s of London insurer Amlin eased to 343.25p, down 2.21 per cent, or 7.75p, after Goldman Sachs switched its stance on the stock to “sell” from “neutral”.

The consumer packaging group Rexam, which was down more than 10 per cent in the session before, fell another 5.9 per cent, or 16.5p, to 262p after UBS reduced its target price for the stock to 420p from 460p.

Sage was among the few stocks in the black. The software group’s share price rose to 165.8p, up 2.09 per cent, or 3.4p, after Merrill Lynch weighed in with a “buy” note.

The broker said that while results from Intuit, the company’s main competitor in the United States, indicated a weak market, current estimates for Sage adequately reflected the situation. “With limited risk to earnings estimates, in our view, and historic trough multiples, we see good support for the shares at the current level, especially when considering that 87 per cent of Sage’s share price is explained by the annuity stream of the current support contracts,” Merrill Lynch added.

On the second tier, Cattles slumped to 3.5p, down 73.58 per cent, or 9.75p, after the sub-prime lender said its preliminary results would be delayed pending the completion of a review of the adequacy of its impairment provisions.

The company said that the review was likely to result in pre-tax profits falling to a level that was “substantially lower” than what the market currently anticipates.

Rentokil Initial was 1.67 per cent, or 0.75p, behind at 44.25p after posting final results. In an attempt to give itself more financial headroom, the business support services group said it was cutting its final dividend. In response, Cazenove reiterated its “underperform” rating on the stock, saying that the move implies a “touch short-term outlook”.

The broker added: “In our view, continued long-term erosion from high margin levels could be accelerated by macro pressures on customer purchasing attitudes.”

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