Market Report: L&G advances as rights issue fears ease
Thursday 19 March 2009
Legal & General bucked the market trend last night, rising by 5 per cent or 1.5p to 31.2p, after a City broker weighed in with words of support.
The life insurer has been the focus of concerns about capital strength in the sector, with investors growing increasingly worried by equity market falls and the prospect of higher-than-expected corporate bond defaults. Taking their cue from the fears, speculators have in recent weeks mooted the possibility of a dilutive rights issue, which has further unsettled sentiment around the stock.
However, the mood improved after MF Global said a dividend cut and a reduction of new business should be enough to see L&G through the current turmoil.
"The company remains exposed to equity markets, but given a reasonably prudent bond default reserve we conclude that it does not require recapitalisation," the broker said.
"This is not the same as saying they definitely won't have one – in fact, L&G probably suffers from having had a rather unnecessary one back in 2002."
MF also expressed its dissatisfaction with the current share price, saying that its sums suggest a valuation of between 55p and 132p. "The recent share price falls appear excessive to us," the broker added, setting an 80p target for the stock.
Elsewhere, the rumour mill was in full flow around JJB Sports, which lost 7.5 per cent or 1p to 12.25p. The chatter suggested Dave Whelan, the founder and former JJB owner who is reportedly in pole position to acquire the company's fitness clubs business, had lowered his offer. The gossip, which follows JJB's announcement of an extension of its standstill agreement with lenders as it tries to dispose of the clubs, offered no detail on the price offered.
Overall, the recent bear-market rally, which showed signs of unravelling in the previous session, crumbled last night, with the FTSE 100 losing 1.35 per cent or 52.1 points to 3,804.9. The FTSE 250 was also weak, losing 20 points to 6,191.7.
Investor sentiment was undermined by official figures which showed that UK unemployment had soared past the 2 million mark, with the number of people out of work rising by 165,000 in the three months to the end of January, well above the 84,800 figure forecast by analysts.
Labelling the data as the "worst ever jobs report", George Buckley, chief UK economist at Deutsche Bank, said "another six months at this rate of increase would see the total rise in joblessness larger than it was during the 1990s recession".
The grim economic news helped to sustain the profit-taking trend in the mining sector, with leading stocks falling back further as investors moved to bank last week's gains. Rio Tinto was the weakest, losing 6.7 per cent or 134p to 1,848p, after the Australian Senate voted to launch a review into foreign investments, prompting worry about the impact on Rio's financing deal with China's Chinalco.
HSBC, which was trading ex-dividend, was the weakest of the banks, retreating by 5 per cent or 23.2p to 436.75p. The wider sector was mixed as investors digested new regulatory proposals from FSA chairman Lord Turner, with Barclays adding 4.7p to 96p, but Lloyds Banking Group easing by 0.4p to 47.6p.
Elsewhere, Venture Production surged 26.6 per cent or 154p to 734p after Centrica, up 0.7p at 247p, said it had bought over 22 per cent of the mid-cap oil and gas group for approximately £243.4m. News of the move, which has been widely trailed by speculators and values Venture at just over £1bn, was supplemented by Centrica's statement that it may make a possible cash offer for Venture. In response, Venture said the price paid by Centrica substantially undervalues its business.
On the downside, the retailer Sports Direct fell prey to a broker downgrade, losing 7.6 per cent or 5p, after Goldman Sachs switched its stance on the stock to "sell" from "neutral".
Burberry, which was added to Goldman's widely followed "conviction sell" list in the same review, was also unsettled, easing by 3.1 per cent or 8.5p to 264.25p.
"[Burberry's] recent outperformance (up 26.4 per cent relative to the sector over the last three months) looks overdone as we believe the company is likely to deliver poor cash generation, given its transformation into a more retail-led business model, requiring more capital absorption," the broker said.
Among smaller companies, Quintain Estates eased by 2.2 per cent or 0.5p to 21.5p amid speculation that it was set to raise £100m via an open offer to new and existing investors.
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