Market Report: Recovery of advertising keeps RBS keen on WPP

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The Independent Online

WPP was in focus last night as analysts highlighted the prospect of gains as further signs of the recovery in the advertising revenues are forthcoming in coming months.

The Royal Bank of Scotland said that, notwithstanding strong gains since the beginning of the year, the stock, which closed 2p lower at 668p last night, was set to trade higher as improvements in market conditions feed through to earnings. And though the recovery was already evident in the company's first quarter results, the broker said the valuation continued to offer the potential for upside gains, not least because management has been holding back and striking an unduly cautious tone.

"After giving over optimistic guidance last year, management is 'once bitten, twice shy' and being overly cautious, in our view" RBS said, repeating its "buy" recommendation, and revising its target price to 800p, compared to 750p previously. "We forecast organic revenue growth improving to 5.8 per cent in the second quarter, which, together with the [easy comparative when it comes to the half yearly operating margin], could see management's body language turn more positive at the interim results."

Overall, the blue-chips strengthened in early trading, but worries about sovereign debt contagion came back to fore in the afternoon, with the FTSE 100 slipping from a session best of 5,371.5 to close to 5,260.99, down 80.94 points. At current levels, the London benchmark is around 9.3 per cent below its mid-April closing high of 5,825 and more than 5 per cent down on the week, putting it on course for one of its worst weeks on record. Beyond Greece, the market was also hit by uncertainty about the outcome of the general election and the FTSE 250 fell by 79.4 points to 9,902.74.

Banking shares remained under pressure, with ratings agency Moody's saying that, though the banking systems of southern Europe, Ireland and the UK faced different challenges, "the contagion risk could dilute these differences and impose very real, common threats on all of them". Barclays was the worst off, shedding 6.5 per cent, or 21.05p, to 301.7p, while HSBC lost 24.2p to 628.4p. Elsewhere, the Treasury was last night sitting on a paper loss on its 49.9p per share investment in the Royal Bank of Scotland, which fell to 48.23p, down 2.17p.

The industrial landlord Segro failed to make any headway, easing by 6.8p to 288.6p following some bearish comment from Goldman Sachs, whose analysts highlighted the prospect of continued weakness in European industrial property markets. The broker also warned of risks to Segro's existing incoming from "the £125m of lease breaks and expiries" across its portfolio by the end of 2012.

"We believe that the scale of the challenges in Segro's operations will become increasingly evident over time," Goldman said, switching its stance on the stock to "sell" from "neutral", with a revised 280p target price, compared to 343p previously.

In the insurance space, Prudential edged up by 0.5p to 549.5p as traders wondered whether it would succeed in its gambit to acquire Asia's AIA. Panmure Gordon said "the disagreement with the Financial Services Authority over the risks involved" could prove the "final straw" for the deal, and may well put Prudential in play, particularly in light of the fact that there would be a willing buyer for the UK operations in the form of Resolution, which was 0.15p higher at 70p after issuing an interim management statement.

Back on the downside, there was some selling around WM Morrison Supermarkets, which fell to 269.8p, down 9p, after posting a drop in underlying sales growth. J Sainsbury was also lower, shedding 7.5p to 325.1p after Seymour Pierce turned negative, saying that while it believed that the company's full-year profits were likely to come in at the top end of hopes, it was "concerned about the outlook for the food retailers and for forecasts going forward". Concerns ranged from the growing competition in the food retail space to rising fuel costs, which will "inevitably affect monthly budgets", the broker said, switching its stance on Sainsbury's to "sell" from "hold".

Biotechnology group Plant Health Care firmed up, adding almost 3 per cent, or 6p, to 218p after signing a deal that will see US group Legacy Seeds develop and market a combination of Plant's Myconate and Harpin seed treatment technologies on alfalfa, the animal feed crop. Evolution said that while it may not have been the "the big one" that shareholders had been waiting for, the agreement hinted at what a larger deal may look like.

"Legacy has a four-year exclusivity period, which will give it time to establish the production and its brand," the broker said. "Plant retains the option to sell the product to a wider customer base at the end of this term, which means it is not locked into the fortunes of Legacy Seeds indefinitely."

The standout riser of the day was Rockhopper Exploration, which said current indications from one of its wells in the Falkland Islands suggested that it had made "the first oil discovery in the North Falkland basin". Traders swiftly piled in, driving the stock to 93.5p, up 153 per cent or 56.5p.

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