Market Report: Smiths is tipped to join assets sale track

 

Siemens' shock swoop on Invensys' rail signalling business last month has got the City chatting about what other clever deals could be worked up in the new year.

Prior to Siemens making its move, most thought Invensys' unpalatable pension problem would put the kibosh on any deal.

But Siemens pulled it off by buying part of the group – the UK rail business in a £1.7bn deal – and now there is hope for others, analysts at Deutsche Bank reckon.

The focus turned to blue-chip technology expert Smiths Group. Smiths has already entertained an approach for its medical business before. In January last year, it turned down a £2.45bn bid from Apax.

But Deutsche's Martin Wilkie and Peter Reilly think "that the template of the Invensys rail disposal to Siemens suggests disposals for Smiths could come sooner than we'd previously thought".

They are so encouraged a deal might occur they upgraded their rating to buy and gave it a share price target of 1,335p.

They think it was the pension problem that caused the deal to go off the boil as it "may have required a top-up post any disposal".

But "the read-across from the structure of the recent sale of the Invensys rail business to Siemens warrants a rethink as to how much of a poison pill the pension really is for Smiths to sell assets".

Smiths has already said it wants to look at its portfolio but Deutsche's team note that so far "it has limited itself to bolt-on M&A".

The City is always predicting M&A action, so there will be hope that Deutsche's theory turns out to be right. The shares, which have gained more than 12 per cent in the past five weeks, were static at 1,145p.

Traders were nursing hangovers from Christmas parties for most of the past week with the name of the game to avoid being in the office as much as possible to avoid the rather dull market despite the benchmark and mid-cap index reaching highs.

The FTSE 100 index has been making slow but steady progress this month. But yesterday investors were weighing up mixed data. The UK's construction sector improved giving hope of an improved economy; construction output increased by 8.3 per cent in October. But concerns about weak United States data and the still unresolved US fiscal cliff meant the index did not stay in positive territory and it lost 7.85 points to 5921.76.

Insurance groups were out of favour and Prudential was the biggest faller, down 17.5p to 881p, while Aviva lost 2.9p to 369.9p.

Oil giant BP was back in focus after Credit Suisse's energy expert took the red pen to their rating. Its Gulf of Mexico oil spill in 2010, the largest accidental marine oil spill in the industry, and subsequent legal claims, sent the shares from a high of 643p in April 2010, to as low as 308p. But Credit Suisse's Kim Fustier thinks the time to snap up the stock on the cheap has passed.

She downgraded BP to neutral from outperform and slashed the target share price to 475p. So where to put your money if you want to sink it into oil? Ms Fustier likes Shell and upgraded it to outperform. BP's shares declined 2.3p to 426.45p and Shell's B shares trickled down 2.5p to 2,198p.

Staying with the benchmark index, miner Anglo American got a downgrade to neutral from analysts at UBS while JPMorgan rates it underweight. The shares hung around the bottom of the index, down 30.5p to 1,826.5p.

But over on the mid-cap index there was better news. The FTSE 250 index managed an all-time high of 12,244.24.

Risers included Egyptian miner Centamin. Its shares lost more than 47 per cent on Thursday when it suspended operations but they recovered 25 per cent yesterday, gaining 6.94p to 34.64p as the threatened fuel supply to its gold mine was resumed.

Retailer Debenhams got a boost from analysts, including an upgrade from UBS' shop watchers who now rate it a buy because of "stronger sales" and the expected boost that Christmas will bring. They retain their share price target of 125p and the shares lifted 0.5p to 114.7p.

Buy

Moss Bros

Snap up shares in suit hire specialist Moss Bros, Peel Hunt's analysts insist. Moss Bros said trading in the second half was within forecasts and its gross margins are recovering. It reported strong demand for the hire of posh suits and its shares closed at 59.25p yesterday. It was its self-help plan of "product development, store refurbishment programme and online expansion" that encouraged Peel Hunt to raise their share price target to 74p.

Sell

HSBC

Flog shares in HSBC, Liberum Capital's Cormac Leech urges. He thinks the "recent rally has been driven in part by unsustainably low loan losses in the third quarter" and rival Standard Charter is 10-12 per cent cheaper. He gave HSBC a share price target of 665p, while he rates Standard Chartered a buy at 1,700p. HSBC's shares ended 641.6p yesterday.

Hold

Volex

Hang on to shares in Apple supplier Volex. The small cap-electrical component supplier revealed its second profit warning in three months with full year profits now expected between $11m to $14m. Its shares ended down 36.5 per cent to 89p. But Investec's analysts rate it a hold because of its strong balance sheet and they think "earnings are recoverable over time". They downgraded their target to 125p.

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