Market Report: Traders bet on more gains at William Hill

Bookmakers were were in focus last night, with William Hill and Ladbrokes advancing as traders studied the scope for further gains.

Both stocks have gained ground in recent weeks. William Hill is up by almost 12 per cent since the beginning of December, while Ladbrokes has rallied by almost 17 per cent over the same period. Despite this run of strength, Cazenove said the bookies continued to offer significant potential on the upside.

William Hill, for instance, trades on a multiple of 10.6 times forecasts for 2010, compared to 11.5 times for Ladbrokes and 12.2 times for the FTSE All-Share index (ex-financials and resources). This is appealing in light of the broker's estimates of 10 per cent earnings growth in 2011 and 15 per cent in 2012. The strength of the company's UK retail division, its online strategy and the fact that, historically, William Hill has traded on a market multiple also weigh in favour of the shares, the broker explained.

Cazenove acknowledged that Ladbrokes' stock is valued at a premium – 8 per cent on the basis of the price to earnings ratio – to William Hill, but said the market may nonetheless be missing sight of the turnaround potential at the group, which recently announced the departure of its chief executive. "We believe that this PER premium only partly reflects the turnaround potential of Ladbrokes' UK retail division, which is significantly less profitable than William Hill's," the broker said, adding that management change could be a catalyst for operational improvement. Cheered by the prospect, Ladbrokes gained 3.5p to 157.5p, while William Hill added 6p to 203.8p.

Overall, the FTSE 100 was 16.54 points ahead at 5276.85, while the FTSE 250 was broadly unchanged at 9292.92, down 0.2 points. A late rush for defensive stocks, with Imperial Tobacco gaining 39p to 2030p, and AstraZeneca rising by 47p to 3102.5p, offset weakness elsewhere and drove the benchmark into positive territory as the session came to a close. Sentiment was also boosted by the IMF, which upped its global economic growth forecast in the afternoon, and by some early gains on Wall Street.

On the domestic front, official figures showing that the UK had finally crept out of recession did little to inspire confidence. The Office for National Statistics said the economy grew at a lower-than-expected rate of 0.1 per cent in the three months to the end of December, sparking worries about the possibility of a dip back into negative territory in the current quarter following the expiration of various stimulus measures at the end of last year.

Fresnillo and Kazakhmys were among the weakest of the miners – down by more than 2 per cent, or 16.5p, to 698p, and by 30p to 1274p respectively – as commodity markets softened in response to Chinese moves to restrict bank lending.

In the wider sector, Xstrata was 18.5p behind at 1084p, while Lonmin declined to 1829p, down 27p, and Antofagasta lost 5.5p to 928p. In the oil and gas space, Cairn Energy dipped to 335p, down 2.3p, while Tullow Oil, which said it had entered into a sale and purchase agreement to buy Heritage Oil's Uganda interests, was 3.6 per cent, or 45p, behind at 1216p.

On the upside, Standard Chartered pulled ahead of its peers, rallying by 2.5 per cent, or 36p, as traders moved to capitalise on the recent weakness in the stock after Nomura revised its stance to "buy". The broker was also positive on HSBC, which was 1.2p weaker at 673.6p.

"We believe that both stocks are likely to outperform given their relative balance sheet strengths and geographic positioning, and view the recent correction as a buying opportunity," Nomura said, keeping its target for Standard Chartered unchanged at 1790p. Elsewhere, Barclays was unchanged at 276p despite some support from Deutsche Bank, which said the stock "looks too inexpensive".

Further afield, easyJet, up 2.5 per cent, or 9.5p, at 396.5p, was boosted by Citigroup, which upped its target for the stock to 525p. Morgan Stanley also weighed in, revising its stance on the sector to "attractive" while raising its target for the airline to 480p. "We expect easyJet to grow disproportionately in Continental Europe and to continue to take market share from charter and flag carrier airlines," Citi said, repeating its "buy" view.

The data centres specialist Telecity was 2p firmer at 398p thanks to Bank of America Merrill Lynch, which initiated coverage with a "buy" stance. "Telecity has a leading position in low-latency outsourced data centres where demand is experiencing explosive growth, but supply is extremely constrained," Merrill said, setting a 470p target price on the stock. "This means prices are going up and that Telecity is able to generate high returns on investments."

Also on the upside, the Royal Bank of Scotland lifted sentiment around Chemring, the military goods manufacturer which was 50p stronger at 3178p after the broker upped its target to 3467p from 3075p on the back of last week's full-year results. "The outlook is upbeat, despite the spectre of global defence budget cuts. Chemring remains in good shape," RBS said, sticking to its "buy" stance.

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