Market Report: Logica advances as broker turns positive

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Logica bucked a weak market trend last night, rising by almost 5 per cent after a leading broker weighed in with some words of support.

Deutsche Bank turned positive, saying that in its view, with consensus sentiment firmly against Logica, and with the market discounting prospective risks, it was time to buy into the IT services group. "The stock is sitting close to trough valuation on realistic forecasts," the broker said. "While we have not divorced from our view that IT services is a late-cycle sector, we believe this is now the consensual view and is discounted. We are signalling that we should be looking through the down cycle."

Deutsche also expressed its confidence in Logica's balance sheet, which, following recent debt refinancing and capital-raising moves, had adequate headroom to see it through the downturn. It added: "We estimate that our forecasts could be downgraded by around 30 per cent before a breach occurred – hence we feel there is a lot of security around the balance sheet." The assessment boosted the stock, which closed at 75.5p, up 3.5p.

Overall, the FTSE 100 was 1.2 per cent, or 50.11 points, lower at 4,278.46, while the FTSE 250 fell by 2.3 per cent, or 174.55 points, to 7,309.05. The benchmark tracked losses on international equity markets, falling below the 4,300-point mark for the first time since early May.

BT remained strong, rising 3 per cent, or 3.1p, to 105.6p as analysts considered the implications of the Government's Digital Britain report, published on Tuesday. Bernstein said the announcements constituted a long-term positive for the company, effectively tilting "the playing field rather more in favour of BT [by] offering solace in the form of a changed Ofcom mandate and a Next Generation Fund (funded initially with a 50p tax on copper line) that will generate roughly £150m to £175m a year in subsidy for the provision of fast broadband to the final third of the country".

"The only point of caution that we can see for BT is that it is still unclear how the bidding process for any subsidy work will actually work," the broker said, as it reiterated its "market-perform" rating on the company's stock.

Bernstein was less optimistic about BSkyB, which closed at 432.25p, up 2.75p. "Were the UK's fibre network to be expanded to include an additional 25 per cent of households, it would reduce the proportion of its customers able to access pay-TV exclusively via satellite from around 60 per cent to around 30 per cent of Sky's total subscriber base," the broker said.

Elsewhere, Rio Tinto fell 7.8 per cent, or 183p, to 2,154p as it began trading ex-rights. The stock was also in focus amid worries that its proposed iron-ore joint venture with rival BHP Billiton might face regulatory hurdles in China.

Rio was not alone, though. The wider mining sector was also unsettled as metals prices relaxed, with Xstrata declining to 643.5p, down 10.2 per cent, or 73p, and Kazakhmys falling to 628.5p, down almost 8 per cent, or 54p, as copper prices retreated. The Eurasian Natural Resources Corporation was also weak, losing 7.2 per cent, or 48.5p, to close at 623.5p.

Anglo American was 6.3 per cent, or 105p, lower at 1,574p after Cazenove weighed in, switching its stance on the miner's shares from "in line" to "underperform".

Back on the upside, the pharmaceuticals group Shire was 1.6 per cent, or 13p, firmer at 828p following some positive comment from UBS, which said the stock had been oversold on worries that revenues from its psychostimulant drug Adderall XR could be lower that expected in the second quarter. Shire also benefited from a more general move into defensive stocks as the market's appetite for risk waned. "While we expect weak second-quarter numbers for Adderall XR, we believe this fear is overly priced in the current share price, which offers an appealing buying opportunity," the broker said, adding the stock to its "most preferred" list.

On the second tier, transport group National Express retreated to 286.75p, a fall of 7.8 per cent or 24.2p, despite announcing that lenders had agreed to delay the tightening of the terms governing its debt, giving it additional covenant headroom for the next six months. Collins Stewart stuck to its "sell" recommendation, however. The broker reduced its earnings estimates for National Express, citing "weak trading in UK rail (principally East Coast) and also in Spain".

The entertainment group HMV was 0.25p lighter at 115.75p after Altium moved the stock from "buy" to "hold", citing recent weakness in the share price. "In the short term, HMV has more to come from its cost reduction programme. It should also be benefit this year from the absence of Woolworths and Zavvi as competitors," the broker said. "However, there are long-term threats to most of HMV's product categories."

Altium said it preferred Game, the video games retailer on which it maintains a "buy" rating, saying that while it also faced threats, it "at least has all of its resources focused on a growing market". At the close of trading, Game was 3.75p lighter at 161p.

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