Market Report: IAG gets its wings back despite fuel price rises

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The Independent Online

Oil prices may have stayed close to their recent highs, but that failed to prevent International Airlines Group (IAG) flying to the top of the blue-chip index last night.

Ever since British Airways and Iberia merged and began trading under their new moniker in January, the airline has seen its share price plummet, falling by 20 per cent as the cost of the black stuff soared. Yet IAG rose by 9.9p to 229.6p yesterday after UBS chose the airline as its "top pick" among the flagship carriers. The broker highlighted IAG's "synergies [and] pension improvement" and said the sector was "due a bounce" if and when oil prices eased.

Despite concerns about "the downside risks to earnings due to the escalating fuel costs... and the ability of airlines to pass on these extra costs timely to passengers", UBS pointed out that many airlines' shares were trading as low as they were in 2008 when aviation fuel costs were higher and the economy was facing a downturn. Its analysts also said they were encouraged to see "capacity discipline beginning to return".

Not surprisingly, volumes on the FTSE 100 were low, with just three trading sessions this week before another four-day bank holiday weekend. Yet it was still lifted by 51.06 points to 6,069.36 – its highest close since February.

Those investors that were getting involved were not particularly keen on miners, however. Sentiment was knocked by rising fears about what the US and China will do to tackle inflation. Randgold Resources dipped 110p to 5,195p, while Anglo American finished 30p behind at 3,132p following its production update last Thursday.

Lloyds Banking Group responded to reports that it is about to sell its Scottish Widows business (which some have said could fetch up to £7bn) and climbed 0.49p to 60.39p. Elsewhere in the banking sector, Barclays advanced 3p to 301.85p ahead of its annual general meeting today, where it is expected to attract criticism from shareholders over its pay awards.

British American Tobacco (BAT) was in smoking hot form, achieving another record high as the cigarette manufacturer shifted forwards 43.5p to 2,637p. Rogerio Fujimori, of Credit Suisse, focused on last week's figures from BAT's US peer Philip Morris International, which the analyst highlighted as positive for BAT ahead of tomorrow's update. Mr Fujimori was also encouraging about Imperial Tobacco, keeping its "outperform" rating, and its shares rose 27p to 2,071p.

The takeover potential of Micro Focus has been a favourite topic of market gossips for a while now, and they were proved right yesterday after the software group revealed that it had received an approach.

Persistent speculation surrounding the company was given new impetus in February when it lost more than 25 per cent of its value following a third profits warning. Micro Focus's announcement of a "very preliminary" approach saw it reach 380p in early trading before moving back to 360.8p at the bell, or 6.75p better off.

Heritage Oil benefited after saying that it was spending $100m on a shares buyback program. The oil company has seen its share price halved since the start of the year, and its chief executive Tony Buckingham decided that enough was enough yesterday, complaining that its performance "neither reflects the underlying value of the assets nor our belief in the longer-term prospects of the company".

His bullishness certainly had the desired effect, at least in the short term, as Heritage shares advanced by 12.9p to 257.2p, although they still remain a long way off the heights seen earlier in the year.

William Hill jumped by 8p to 221.3p as the gambling group found a backer in Deutsche Bank following last week's interim management statement. The broker increased its price target from 222p to 249p, saying the bookmaker's online business was continuing to outperform the industry, and reiterated its "buy" recommendation. Less keen, however, was Royal Bank of Scotland, which also upgraded its target price but only moved it to 150p while keeping a "sell" rating. Analysts at RBS did concede that the update was "impressive" but said they believed "the market is a little too complacent about UK online gaming risks".

Elsewhere, SDL ticked up 9p to 641p after releasing a brief update on its first quarter. The software company, which specialises in translation programs, said trading over the period had met expectations.

Down on the Alternative Investment Market, Allergy Therapeutics enjoyed a boost of nearly 12 per cent, charging up 1.62p to 15.5p, but not because of increased demand from hay fever sufferers as the pollen count soars. Rather, the pharmaceuticals group received good news from America, where the US Food and Drug Administration cleared the path for it to continue developing three allergy products.

Also on the Aim index, the anti-counterfeiting group OpSec Security rose by 4.75p to 27.75p after revealing that it had received a takeover approach.

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