Market Report: Mitchells falls amid further FTSE gains

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The Independent Online

The footsie registered a second session of gains last night, but Mitchells & Butlers fell back amid worries that it may raise capital in the year ahead.

Mitchells has so far steered clear of the path pursued by the likes of Greene King and Marston's, both of whom have sought cash from shareholders. This leaves the group looking overleveraged relative to peers, according to Goldman Sachs, which yesterday said there was a good chance that Mitchells may fall in line with the other pubcos.

"We see a high probability that [Mitchells] looks to raise capital over the next year, which we estimate would be dilutive to earnings," the broker said, pointing out that the debt burden may also have left the group constrained strategically.

Besides, the trading picture appeared clouded, with recent updates showing that both like-for-like sales and profits are "no longer outperforming peers such as JD Wetherspoon and Greene King". According to Goldman, the full-year trading statement is likely to underline that margins have remained under pressure over the second half, and that like-for-like sales growth is "no better than in line with managed [pub] peers".

Taken together, the two issues leave the stock looking expensive compared to managed pub peers, the broker explained, adding Mitchells to its widely followed "conviction sell" list. Altium also weighed in, downgrading Mitchells, which closed 1.4 per cent or 3.9p weaker at 276.9p, to "hold" from "buy", also on valuation grounds. Greene King, which was added to Goldman's "conviction buy" list, rose to 451.4p, up 3.4 per cent or 14.8p, while Marston's closed 2.1 per cent or 2p higher at 97p. JD Wetherspoon, which was downgraded to "hold" at Altium, was weak, however, declining by more than 3 per cent or 15.6p to 460.4p.

Overall, news that the French and German economies grew in the second quarter of the year boosted sentiment, overshadowing some disappointing data on US retail sales, which unexpectedly dipped last month. As a result, the FTSE 100, although off session highs, closed 38.7 points higher at 4755.46, while the mid-cap FTSE 250 index gained 131.73 points to 8483.66.

Despite the day's gains, Anthony Grech, market strategist at IG Index, struck a cautious note, saying: "We may have realised fresh multi-month highs today with the Footise threatening a test of the 4,800 level that was last seen at the start of October, but whether we can continue to build on these gains remain to be seen."

British Land was the speculative feature of the day, with the commercial property group's shares touching a session high of 513p before closing 2.5 per cent or 11.8p heavier at 493.1p amid a sudden burst of bid talk. Heavy volumes in early trading prompted talk of stake-building, which in turn gave rise to rumours that a consortium of Asian investors – possibly including Chinese institutions – was building a platform from which to launch an offer.

The consortium was said to be mulling a bid of up to 600p per share, although some institutional investors in British Land were said to be minded to hold out for as much as 700p. A second rumour suggested Middle Eastern consortium could also be interested. Yet another rumour suggested that the Government of Singapore Investment Corporation, which already owns shares in the group, was out upping its stake, although this was played down by market sources.

The prospect of bid activity powered the wider sector, with Land Securities advancing by nearly 5 per cent or 29.5p to 626.5p, and Hammerson, the target price for which was raised to 320p from 260p at Société Générale, climbing to 397.3p, up nearly 2 per cent or 7.5p.

Elsewhere, the oil services group Petrofac rallied by almost 9 per cent or 74.5p to 910p, with traders welcoming news that the stock had been added to the MSCI United Kingdom index, putting it in line for additional interest from fund managers.

The Eurasian Natural Resources Corporation mounted a comeback, gaining almost 6 per cent or 45.5p to 808.5p as investors bought in on recent weakness. Others in the mining sector, including Kazakhmys, up 5.4 per cent or 46.5p at 900.5p, Antofagasta, up nearly 5 per cent or 34.5p at 746.5p, and Lonmin, up 4.2 per cent or 59p at 1475p, were also strong.

Further afield, house builders rallied as recovery hopes took root, with Persimmon gaining 4.1 per cent or 18.9p to 482.9p, and Barratt Developments climbing to 228.6p, up 3.7 per cent or 8.2p. Redrow also firmed up, advancing by almost 4 per cent or 7.4p to 198.8p.

Also on the upside, CSR gained just over 3 per cent or 13p to 445.5p, thanks to Panmure Gordon, which named the stock as its "favoured pick" in a semiconductor sector review.

"We believe the second quarter rebound in semiconductor demand was driven by less aggressive de-stocking rather than any form of re-stocking," the broker said,

"Consensus estimates for both handset and chip demand in 2009 are currently based on normal seasonal demand progression from second quarter sell-in numbers. We believe this is a conservative assumption."