Demerger hopes underpinned gains in the oil services group Petrofac, which strengthened as the FTSE 100 kicked off the new quarter with a rally last night.
The stock led the blue chips, rising by 7 per cent, or 84p, to 1286p as traders looked ahead to the hiving-off of a chunk of Petrofac's energy developments into EnQuest, which is due to be admitted to the London market next week. Keith Morris, an analyst at Evolution, said that while the move would lead to a cut in earnings estimates, the remainder of the business – particularly its engineering and construction (E&C) division – were going strong and, as a result, the downgrade would be modest, with his forecasts for 2010 coming down by only 6 per cent.
"We have looked at the prospects for Petrofac's core E&C business and believe there is scope for the group to offset much of the drop in revenue and profits in energy developments through the ongoing growth in E&C," Mr Morris said. With Petrofac's valuation looking attractive – ex-cash, the shares trade on a multiple of less than 12 times forecasts for 2011 – he added that he was switching his stance back from "neutral" to "add". Evolution also set a new target price of 1300p, saying it would "look to take advantage of any post-demerger weakness" in the Petrofac share price".
Besides the broker's assessment, Petrofac was supported by stronger commodity markets, which boosted a number of mining issues. As a result, the FTSE 100, which had been under pressure amid profit-taking earlier this week, closed at its highest level since June 2008, adding 1.2 per cent or 65.25 points to 5744.89. The FTSE 250 was also higher, adding 144.24 points to 10309.52. Xstrata led the miners, adding 51.5p to 1300p, while Eurasian Natural Resources Corporation rose 33p to 1225p as traders bought in on news of a better-than-expected second quarter ferrochrome price settlement. The news also drove sentiment around the smaller International Ferro Metals, which rallied by more than 8 per cent, or 3.75p, to 46.75p. A spike in the price of copper, which touched 20-month highs following some positive data on Chinese manufacturing activity, took the Chilean copper miner Antofagasta up 35p to 1075p.
Elsewhere, the distribution and outsourcing company Bunzl built on some words of support from Citigroup, rallying by 19p to 740p after the broker turned positive. Citi said Bunzl's core business, based on current returns, was worth 780p on its numbers, while the acquisition option (the company has consistently sought bolt on deals over the past 10 years and with credit markets improving there is scope a return to the acquisition trail) is worth 40p per share. The combination took the broker's target price to 820p, driving an upgrade from "hold" to "buy".
On the downside, Vodafone was held back, easing by 0.3p to 151.7p despite the buoyant market trend. The weakness was down to news from the telecoms regulator Ofcom, which proposed cutting how much operators charge when connecting a call from an outside network.
The pharmaceuticals group GlaxoSmithKline was also weak, losing 8.5p to close at 1257p, partly because of a spike in the market's appetite for risk, and partly because of data from IMS Health, which revealed that sales of prescription drugs in the US rose by 5.1 per cent in 2009. Though higher than 2008, the pace of growth remains low in historic terms.
Further afield, the software group Micro Focus International rose by 14.5p to 516p as analysts welcome the appointment of Nokia's Nigel Clifford as its new chief executive. UBS said that while many Micro Focus investors might not know Mr Clifford from his previous roles, "he ticks the boxes", including having experience as a chief executive.
Panmure Gordon was also positive about the appointment, noting: "At last a significant cloud is removed from Micro Focus. One of the most attractive job vacancies in the UK tech sector has just been snaffled – and, in our view, one of the most attractive investment propositions and valuations is still on the table."
The pubs operator Greene King was boosted by Goldman Sachs, strengthening by 8.9p to 457.1p after the broker raised its target for the stock from 520p to 570p. "We believe any sign that the UK unemployment rate is stabilising should act as a catalyst for a re-rating as the focus shifts to recovery in 2011," said Oliver Neal, a Goldman analyst, reiterating his "conviction buy" view. "We continue to believe that part of the margin erosion of the past few years is cyclical rather than structural and, therefore, expect profit margins to improve as the eating out market returns to historical rates of growth."
Also on the upside, the funds firm Gartmore continued to recover ground lost after it announced the suspension of its fund manager, Guillaume Rambourg, amid an internal investigation. The stock rose another 16p to 141p after Mr Rambourg's colleague, Roger Guy, helped to calm nerves via an online investor conference overnight. Killik & Co's head of research, Mick Gilligan, while repeating the brokerage's "buy" view on Gartmore, said Mr Guy reiterated that the probe was internal and not an FSA investigation.
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