Market Report: Pub owners firm up on hopes of rerating

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Pub companies were in focus last night after a leading broker weighed in, highlighting the scope for a sector-wide rerating as the market regains its appetite for cyclical stocks.

Marston's, up 3.8 per cent or 3.25p at 88.25p, Greene King, up 3.1 per cent or 13p at 432.75p, and Enterprise Inns, up 1.4 per cent or 1.75p at 125p, firmed up after analysts at Bank of America Merrill Lynch said the sector, which has been hit by tougher trading conditions and a growing aversion to debt, was on track to pare losses as the trading picture stabilises and debt-related fears recede. The threat of inflation may provide an additional boost, Merrill added, highlighting what it called "the natural hedge" offered by pub companies. "They own property assets which will increase in value as inflation occurs and securitised debt which will fall in value," the broker said. "Interest rates on the debt are mostly fixed, which will be an advantage."

Other positive catalysts include a spell of sunny weather, rising disposal income, the trend of consumers trading down to pubs from bars and restaurants and the weaker pound, which should help lure more tourists to the UK. Easing cost inflation and the 2010 World Cup should also help the sector, the broker added.

Overall, the FTSE 100 was 54.87 points firmer at 4443.62, while the mid-cap FTSE 250 index gained 85.97 points to 7666.63 last night, as traders welcomed some positive news regarding CIT, the troubled American business lender which was reported to have secured a last-minute financing deal with bondholders.

Sentiment was also lifted by official figures showing that the construction of new American homes had climbed to its highest level in seven months in June.

Insurance issues were in fine form after Resolution, the financial services tycoon Clive Cowdery's investment vehicle, sweetened its offer for Friends Provident, which was 2.4 per cent or 1.73p stronger at 73.23p. After the close, Friends rejected the latest proposals. Besides the prospect of bid activity, investors were also cheered by Morgan Stanley, which switched stance on the European insurance sector to 2 per cent "overweight" from "neutral", helping Legal & General climb to 61.38p, up 7.6 per cent or 4.32p, and Old Mutual gain 3.3 per cent or 2.8p to 88.9p.

Over in the banking sector, Lloyds gained almost 7 per cent or 4.51p to 72.01p following reports that it may post a profit for the first half of the year. "We haven't published interim forecasts but clearly the first half will benefit from a very sizeable negative goodwill gain through the [profit & loss] account. In that context, it should report a statuary profit," Credit Suisse said in response. "However this is well understood by the market. What would be more interesting is if the company were to generate a profit excluding this item."

The wider sector was also firm, thanks in part to relief at the news regarding CIT. As a result, against the backdrop of the Conservative Party's regulatory reform proposals, Royal Bank of Scotland climbed to 39.795p, up 1.395p, while Barclays closed broadly unchanged at 313p, down 0.1p.

Elsewhere, on the downside, the medical equipment maker Smith & Nephew fell back, retreating to 440.75p, down 2.4 per cent or 10.75p after Cazenove switched its stance on the stock to "in line" from "outperform", citing the potential impact of the swine flu outbreak on elective procedures.

On the second tier, Yell eased to 22.25p, down 1.1 per cent or 0.25p, after Royal Bank of Scotland weighed in, scaling back its target price for the directories group's stock to 25p from 45p. "We now forecast Yell breaching banking covenants at year end," the broker said, sticking to its "hold" stance.

Further afield, Bovis Homes was 5.3 per cent or 22.25p stronger at 439.25p thanks to UBS, which moved the house-builder's stock to "buy" from "neutral", with a revised 518p target price, compared to 491p previously, citing the prevailing discount to tangible net asset values. "Given recent signs of price stability and a balance sheet which puts Bovis in a position to buy land, we see attraction in the shares," the broker said.

UBS also reiterated its positive stance on Barratt Developments, which climbed to 174.5p, up almost 6 per cent or 9.75p.

"Given [that] the group has already lost out on some attractive land opportunities due to a relatively inflexible cash deployment situation, we suspect an equity issue is made in due course," the broker said, adding that Barratt's valuation appeared attractive even after the prospective dilution to tangible net asset values from a possible equity issue.

Also on the upside, HMV gained almost 5 per cent or 5.75p to 122p following some words of support from Seymour Pierce. "The stock has significantly underperformed the general retail sector and UK market (FTSE All Share) by 22 per cent and 20 per cent respectively over the last quarter," the broker said. "It is now rated 9.5 times our revised 2009/10 forecasts valuing it at a 25 per cent discount to the general retail sector."

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