Market Report: Melrose dips as momentum slows

 

Engineering firms topped and tailed the benchmark index yesterday. There was a contrast in fortunes for IMI and Melrose.

Investors took fright at a profit warning from Melrose, the blue-chip newcomer. It warned that sales growth had almost halved in the last four months. It took the wooden spoon, with its shares down 27.1p to 208.9p, as investors took heed of its warning about the outlook for next year. Melrose, which bills itself as an industrial turnaround specialist, said: "Revenue trends slowed, and the sales outlook for 2013 has become more uncertain."

In contrast, international-focused but Birmingham-based IMI said revenues for the four months to November were 3 per cent ahead of last year. It makes fluid control valves for a variety of businesses, including McDonald's restaurants, but its best-performing sectors were supplying nuclear, oil and gas. Its shares soared 16p to 958p, topping the index.

Another engineer, Castings, which supplies the truck and car industries, showed signs of decline, and reported that pre-tax profit fell 10 per cent to £9.1m for the six months to October. Its shares lost 50.25p to 296p.

Global concerns pushed down the FTSE 100 as escalating tensions in the Middle East, US budget issues and continued eurozone worries all dragged the market lower. The index ended down 72.16 points to 5,605.59, the lowest in over three months.

For those eternal optimists out there, there were hopes that bargain-hunters will emerge next week now the index has fallen close to the 5,600 mark.

The City was in two minds on Reckitt Benckiser's pill-popping deal. The consumer goods giant Reckitt made a $1.4bn (£900m) bid for the US vitamin maker Schiff Nutrition, beating the rival $1.2bn bid from Bayer. Its shares edged down 47p to 3,704p, but the City's analysts had polar opposite views.

Deutsche Bank's Harold Thompson gave Reckitt a buy rating with a 4,100p share price target. Thompson compared it favourably with Reckitt's purchase of US drugs group Adams a few years ago, adding he continues "to see Reckitt as a very attractive stock in what is a fairly valued consumer staples space".

Meanwhile, Liberum Capital's Pablo Zuanic argued that growth in the vitamins industry "has decelerated and price competition has increased, and we wonder why companies focused on health and nutrition like Nestlé and Danone have not entered this industry before". But he added: "We will keep an open mind and wait for Reckitt to discuss growth targets and plans." Still, Mr Zuanic said he rates Reckitt as a sell as "we estimate the Suboxone business would have to almost quadruple for the implied valuation of the rest of Reckitt to be justified". He gave it a share price target of 2,900p.

The water and waste group Pennon lost 29p to 599.5p as five analysts cut their share price targets after an update that growth at its recycling business had slowed down yesterday.

BP has agreed to plead guilty to criminal misconduct and will pay $4.5bn for the Deepwater Horizon disaster. Its shares trickled down 8.8p to 416.6p. Separately BP yesterday won the rights to four blocks in offshore Nova Scotia. It has pledged to invest more than $1bn in exploring for oil.

On the mid-cap index, the hedge fund manager Man Group said it had sold the rights to a set of legal claims against the Lehman Brothers estate to Hutchinson Investors for $456m at a 32 per cent premium. The money will help its cash position. The hedge fund has faced falling business volumes and its shares have tumbled since the beginning of last year. They lost another 1.95p to 71.8p.

Over on Aim, the US jeweller Tiffany & Co thinks it has spotted a diamond in the rough. The miner DiamondCorp has secured $6m of development funding for its Lace Diamond mine from the Fifth Avenue jeweller. The deal comes days after Harry Winston paid $500m to buy the Ekati diamond mine from BHP Billiton as the search for commercially viable diamond mines becomes harder. DiamondCorp jumped 0.5p to 4p. The deal allows Tiffany first right of refusal to buy stones from the Lace mine in South Africa.

Bodycote 376.4p (up 13.7p, 3.78 per cent) The engineer said revenue had grown 2.9 per cent in the four months to the end of October boosted by aerospace, defence and energy which were up by 14.4 per cent.

Savills 410.2p (up 3.0p, 0.74 per cent) The property services firm was up for the second day after revealing on Thursday that its year results will be slightly ahead of forecast.

Lonmin 471.3p (down 19.1p, 3.89 per cent) Xstrata, the 24.5 per cent shareholder of the platinum miner, said on Thursday it will back its $817m rights issue. But the price of platinum continued to fall.

Supergroup 638.5p (down 51.5p, 7.46 per cent) Andrew Wade at Numis Securities cut the fashion retailer to sell with a share price target of 530p and said he was concerned by recent declines in sales.

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