Market Report: Rolls-Royce rises on recovery hopes

Hopes of a recovery in the civil aerospace market boosted Rolls-Royce, the engineering group which firmed up even as the market gave back some of Friday's gains.

Goldman Sachs said recent data points – including more optimistic economic forecasts, a slower pace of decline in air traffic, better than expected aftermarket sales in the first quarter, improved aircraft financing conditions, some stability in aircraft value and signs of improvement in the market for business jets – suggest that the civil aerospace market offered "significant medium and long-term upside" for investors willing to looking ahead to 2011-2015.

"We expect 2011 to mark the bottom of the new aircraft delivery cycle," the broker said, adding: "We actually expect civil aerospace earnings to bottom in 2010, as 2011 brings strong aftermarket growth, cost reduction benefits, and better foreign-exchange hedges."

Rolls-Royce, which has extensive civil aerospace operations, stands to benefit as the recovery dawns, Goldman said, highlighting that the company had "moved faster than other European civil aerospace companies to reduce costs in response to the current economic crisis".

Raising its earnings forecasts for this year by 3 per cent, and by 10 per cent each for next year and the one after, the broker helped the stock, which was upgraded to "neutral" from "sell", to rise to 335.5p, up 6.25p. Sector peer Meggitt, which was moved to "buy" from "neutral" at Goldman, climbed to 166.25p, up 3.25p.

Overall, the market retreated from Friday's US payrolls data-inspired gains, with the FTSE 100 easing to 4,405.22, down 33.34 points, and the mid-cap FTSE 250 index losing 59.47 points to 7,687.86.

Lloyds lagged behind on the roster of blue chips, sliding by 7.7 per cent or 5.1p to 61.1p, after the lender said it would use the proceeds of a share sale, and some of its existing resources, to begin repaying the UK taxpayer.

Barclays, which said it was still engaged in talks to sell its iShares business, and the broader Barclays Global Investors arm, was also weak, easing to 283.75p, down 1.25p, amid reports suggesting Blackrock, the US money manager, as the most likely buyer, ahead of the Bank of New York Mellon.

Elsewhere, miners retreated as metal prices eased, with Anglo American trading back to 1,770p, down 4.7 per cent or 87p, and Vedanta Resources relaxing to 1,595p, down 4.4 per cent or 73p.

Lonmin, down 2.2 per cent or 32p at 1,432p, was caught in the downdraft, despite some supportive words from Merrill Lynch. Just back from a visit to the platinum miner's operations at Marikana in South Africa, the broker reiterated its positive stance on the shares, saying that the "feedback from the trip was generally positive on both strategy and progress on the operating front".

Merrill added: "We reiterate our out-of-consensus buy [rating] and believe that analysts will likely start to look at the counter as a long-term value play, and that opinion should shift accordingly."

Investors banked profits in parts of the retail sector, too, with Home Retail Group easing by 2p to 248p ahead of a first-quarter update this week. Marks & Spencer was 2.25p behind at 283.75p, while the supermarket giant Tesco fell to 361.5p, down 2p, after an Indian parliamentary panel said the government should ban foreign groups and large domestic corporates from entering the retail trade in grocery, fruits and vegetables.

Further afield, on the FTSE 250, 3i, the private equity group which is pegged to re-enter the FTSE 100 in the upcoming index review, was 3.4 per cent or 8.5p firmer at 260p. The results of the review, which will be based on share prices at the close tonight, are due to be released after the end of play tomorrow night, with the changes taking effect after the market close on Friday 19 June.

Wolseley, which was 10p ahead at 1,083p, also drew steam from hopes that it will reclaim a berth among the blue chips, shrugging off a bearish RBS circular, which said that while the construction materials group has moved to bolster its balance sheet, ringfence its troubled Stock Building Supply arm in the US, and address the spread and diversity of its distribution portfolio, the remaining levels of debt may prove "too onerous given the latest step down in market conditions, [which were] evident in the third quarter trading update".

"In the coming weeks, we expect macro factors to weigh on the stock – notably any further significant movement in bond yields (with a consequent impact on mortgage finance availability) as well as housing starts and non-US residential construction news flow trends," the broker said, resuming coverage on the stock with a "sell" recommendation.

Among smaller companies, BPP Holdings, the professional education and training provider, surged almost 9 per cent or 51p to 618p after unveiling a recommended 620p per share offer from Apollo Global, an education services–focused investment firm backed by the Carlyle Group, valuing BPP at £303.5m.