Market Report: Premier Foods hit by fear of equity issue

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The Independent Online

Premier Foods was unsettled last night after JP Morgan questioned the company's ability to avoid a dilutive equity offering.

The broker said that although it expects a robust trading update from the food producer next week, it was concerned about Premier's end of March deadline to decide on a new capital structure.

"[It] may likely imply a dilutive eq-uity raising exercise (we believe asset sales are unlikely, as interest so far has concentrated on the company's larger brands) so we prefer to remain sidelined," analyst Pablo Zuanic said, reiterating his "underweight" stance on the stock.

"The company argues that a £300m injection would be enough, but we estimate £580-780m may be the range preferred by the banks. True, post-offering, the stock could re-rate, but the question mark remains by how much and what would be the discount of any equity offering," he said, holding back from putting a target price on the stock.

Citigroup, which also weighed on Premier last night, was more positive, sticking to its "buy" recommendation and 45p target price.

The stock closed down 1.5 per cent, or 0.5p, at 33p.

Overall, the Bank of England's decision to trim UK interest rates to 1.5 per cent, down 50 basis points, helped the market recover from earlier losses. The FTSE 100 recovered from a session low of 4,410.48, down 97.03 points, to close broadly flat at 4,505.37, down just 2.14 points. The FTSE 250, although 70.05 points weaker at 6692.25, was also firmer than the levels struck at the start of the session.

Traders said the while the Bank's move had helped in the short term, it was more or less priced in across the market. "It's a big yawn for trad-ers and investors," said Manoj Ladhwa, senior trader at spread betting firm ETX Capital.

On the FTSE 100, Royal Bank of Scotland advanced to 50.6p, up 3.3 per cent or 1.6p after saying it was reviewing its Bank of China stake.

Its sector peer, Standard Chartered, remained on the back foot, losing another 6.5 per cent, or 60p, to 860p on fears about the fate of emerging market economies as the global slowdown gathers pace.

Macro concerns also bore on the mining sector, which continued to underperform amid nervousness about US non-farm payrolls data, a widely followed gauge of American economic activity which is due to be released tonight. A bad report is likely to reinforce fears about a slump in the demand for commodities as US the consumers fewer products.

The weak sentiment hit Vedanta Resources, which finished third on the FTSE 100 loserboard, down 6 per cent, or 45p, to 705p.

Anglo American, in fourth place, was down 5.9 per cent, or 102p, at 1,623p while Rio Tinto lost 4.5 per cent, or 82p, to 1,730p.

Among retailers, Marks & Spencer retreated to 234.5p, down 3.9 per cent or 9.5p. Numis issued a "sell" note on the stock, saying that although the company's recent update was better than feared, it remained concerned about "structural problems, ongoing forecast risk and £3bn of debt". Elsewhere, J Sainsbury issued an upbeat trading statement. The stock gained only 6p to 328.75p, however, as some wondered whether the recovery story had run its course.

On the FTSE 250, Eaga succumbed to some profit-taking, falling to 129p, down 8.7 per cent or 12.25p, after Goldman Sachs moved the stock to "neutral" from "buy" on account of recent outperformance.

Similar factors were behind UBS's decision to move property group Derwent London, down 3.9 per cent, or 33p, at 810p, to "sell" from "buy".

"Since late November the share price is up [around] 30 per cent," the broker said. "We believe this leaves little room for further short-term appreciation, given the continued deterioration of the UK economy and a continuing trend of falling rents and values."

On the upside, Punch Taverns was the strongest, gaining 14 per cent or 8.75p to 71.25p, after hedge fund manager David Einhorn upped his stake in the pubs group to almost 8.2 per cent.

Among smaller companies, the debt solutions provider Loanmakers slumped to 0.175p, down 53 per cent, or 0.2p, after saying that it still hadn't resolved its funding issues and that trading remained poor.

Alliance Pharma, on the other hand, surged to 4.375p, up 20.7 per cent or 0.75p, after reporting an upbeat pre-close update, saying that results for the year to the end of December 2008 were "expected to exceed market expectations significantly".