The prospect of a re-rating supported Lloyds Banking Group, which strengthened as the FTSE 100 recovered last night.
Exane BNP Paribas said that while growing confidence in the earnings outlook should making earnings-based valuation metrics more credible for now, with Lloyds' recapitalisation programme complete, tangible book value provided a suitable guide and, against this, the stock appeared cheap.
The broker forecast trough tangible book value per share of 51p in 2010, recovering to 60p by 2012, which currently leaves Lloyds trading at just 1.1 times the trough tangible book estimate – an "unreasonable" discount given the recovery in the bank's capital position and the improvement in economy. Exane also weighed in on the issue of the Treasury stake, playing down the prospect of a sale this year.
"Even after raising our 12-month target price for Lloyds Banking Group to 67p, this remains well below HM Treasury's averaged-down in-price of 74.35p," said Exane's analyst Ian Gordon. "By implication, the fact that we do not consider it likely that Lloyds will breach the Treasury's average in-price in the near term means that technical issues around how and when UKFI manages a sell-down of its shareholding should be irrelevant in 2010." His comments helped to drive Lloyds up 1.5p to 57.5p.
The wider banking sector was also on a firm footing, with Barclays rising by 4.95p to 318.65p and Standard Chartered strengthening by 20p to 1566p. Royal Bank of Scotland rose by 0.4p to 36p but HSBC was held back, closing 3.1p lower at 714.6p, with traders pinning the weakness on a continuing round of profit-taking. Overall, the FTSE 100 turned positive, rising by 24.72 points to close at 5,498.2, while the FTSE 250 was broadly unchanged at 9,568.03, a fall of 1.49 points.
The mining sector, which proved a drag on the benchmark earlier in the week, was behind last night's gains, with Xstrata rallying by 47p to 1220p and Antofagasta gaining 31p to close at 1031p. The former was supported by Investec, which issued a sector review that named Xstrata its top pick of the large-cap diversified miners.
"The company offers peer group leading leverage to rising commodity prices, strong organic growth, and a growing capacity for opportunistic mergers and acquisitions activity as strong free cashflow reduces its debt burden," Investec said.
It estimated that a 10 per cent increase in all commodity prices would boost its 2010 earnings estimates for Xstrata by 32 per cent, compared to 23 per cent for the company's peer group.
Over in the insurance sector, Aviva was 5.7p ahead at 414.7p, while Legal & General rose 1.85p to 84.8p amid a smattering of bid talk. Clive Cowdery's Resolution vehicle was said to be on the prowl once again, with both companies being mentioned as potential targets. Besides the rumours, the two stocks were also supported by analysts at Morgan Stanley, who included both L&G and Aviva in their list of key insurance picks.
British Land, which was down 10.2p at 455.8p, and Liberty International, which fell 8.3p to 484.3p, were under pressure after Nomura turned bearish about real estate investment trusts (REITs). "UK commercial property prices are bouncing – that's the end of the good news," the broker said, hitting sentiment across the sector.
It added: "REIT share prices are under increasing pressure to deliver elevated expectations. Quantitative easing is a temporary stimulus and returns are at risk from capital rationing, rising bond yields and fragile rents."
Also on the downside, retailers weighed on the FTSE 100, with Home Retail Group declining 17.7p to 265.8p after the Argos owner posted what Credit Suisse termed a "disappointing trading update despite consensus upgrades of around 7.5 per cent". "We believe the flat like-for-like performance at Argos is likely to be taken as disappointing," the broker said.
In the wider sector, Marks & Spencer was 12.1p weaker at 356.3p, while the fashion retailer Next fell 17p to 2008p.
Further afield, the outsourcing specialist Eaga was 7.4p better off at 148p after Collins Stewart raised the prospect that the compant would be awarded new contract.
"Last week, Eaga announced a three-year agreement with the Drax power station to deliver its portion of the community energy savings programme. We believe Eaga is trying to negotiate a similar deal with another generator," the broker said, sticking to its "buy" stance on the stock.
Also on the upside, the recruitment group Hays was 4.7p ahead at 110.7p last night thanks to Morgan Stanley, which raised the stock from "equal weight" to "overweight" with a 145p target price, compared with a price of 130p previously.
Its sector peer Michael Page International was 9p behind at 397p after the broker moved it from "overweight" to "equal weight" with its target price revised upwards from 420p to 455p.
Morgan Stanley cited the stock's relative strength in recent months, saying: "For Hays, December 2009 net debt was £40m versus our £100m estimate, reducing the probability of a dividend cut."Reuse content