Market Report: Imagination gets a vote of confidence

  • @LauraHChesters

Apple wobbled last week, and shares in smartphone makers shuddered. The US superstar tech brand reported its lowest sales growth since 2009, and investors ran scared from Apple suppliers such as Imagination Technologies, which lost more than 5 per cent after the bad Apple news.

But Morgan Stanley's scribes dispelled fears about Imagination, and the shares leapt more than 12 per cent to the top of the mid-tier index.

The Hertfordshire-based group designs the graphic-processor units for the screens of smartphones but Morgan Stanley's techies reckon there are two things that punters are underestimating. They think it is time to buy the shares, and rate them overweight. They raised their price target from 450p to 570p and the shares gained 56.4p to 497.9p.

The two reasons for their sudden keenness? Samsung's anticipated Galaxy S4 and the growth potential of emerging markets.

Morgan Stanley's team is basing its strong enthusiasm for the stock on a hunch that Imagination has won work on Samsung's S4 smartphone. The phone is rumoured to be launching in April. Morgan Stanley said Imagination's management hinted in December that it had secured a "design win of meaningful units at Samsung".

It bet that, should the win prove to be the Galaxy S4, there could be a 16 per cent gain in the royalties it gets from sales.

But before you get carried away and rush out to buy up the shares, the team added: "We note the company has not yet confirmed details. If we are wrong, upside to our base case would be lower."

But S4 aside, Morgan Stanley reckons there is plenty of potential in emerging markets. It thinks Imagination's "exposure to the Chinese smartphone market through a licence with MediaTek", which has 44 per cent market share, is being undervalued. It adds that Imagination's current share price "implies the market is underestimating the ramp-up" for MediaTek sales in the next few years.

In the wider market, bullish investors on the benchmark FTSE 100 index were finally stopped in their tracks after a five-day run when shock data from across the Pond suggested the US economy shrank at an annualised rate of 0.1 per cent in the fourth quarter last year. The index retreated 16.08 points to 6,323.11.

Dragging the leaderboard down was the Chilean miner Antofagasta. The costs of producing copper are set to soar but the demand for the metal is flat. The group said production was up more than 10 per cent, but its weaker outlook drove down the shares by 106p to 1169p.

Keeping it company was the oil services group Petrofac as news out of Italy spread to the Square Mile. A surprise profit warning from a Milanese oil and gas specialist sent shares in its global peers plummeting. The shocker for Saipem caused traders in London to dump Petrofac stock.

Saipem's profit warning emerged last night after the market closed. It said last year's profits will be 10 per cent below consensus and this year's will be a staggering 50 per cent below. Peer Petrofac plunged 122p to 1,615p, and Citi's scribes said that the Saipem siren is "likely to lead the whole sector down".

But Malcolm Graham-Wood, an analyst at VSA Capital, played down the impact on Petrofac, and even thought the dip in its share price could be time to buy. He said: "Other service companies have suffered in the wake of this warning but it's not actually truly comparable, except maybe to Technip. Accordingly, I would take the chance to top up with a few Petrofac shares, or at least not panic out at this stage."

The supplies distributor Bunzl was top of the table after analysts at Numis Securities rated it a buy with a share-price target of 1,505p. The shares delivered a 28p gain to 1,134p.

On Tuesday night, a US judge accepted an agreement by the oil giant BP to plead guilty for its role in the Deepwater Horizon disaster. It will pay a $4bn (£2.5bn) fine. Some decided now was time to suggest that BP might sell its US operations to Exxon, but most thought this was idle chatter. The shares edged up 0.25p to 475.9p.

The chief executive, finance director and chairman of Quercus Publishing have upped their stakes in the publisher of Stieg Larsson's The Girl with the Dragon Tattoo, and the shares rose 5p to 58p. The company warned last week that annual profits would be "significantly below market expectations".

The AIM oil driller Bowleven's shares spiked 4.25p to 67.75p after it said it had made a "potential" oil discovery off the coast of Cameroon.