Market Report: Yell feels the pain as broker slashes target price

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The Independent Online

The directories group Yell hit a low of 66p yesterday after JP Morgan slashed its target price for the stock by almost 82 per cent to 92p from 510p.

"We see risk of downward pressure continuing," the broker said, citing the deteriorating macro environment in Spain, the UK and the United States, continued short interest in the stock and market concern about the possible debt covenant breaches.

JP Morgan added: "Unless there is a significant positive catalyst, we see risk that the shares continue to trade at a substantial discount to the sector." Yell closed down 2.5p at 70.5p. The stock has slumped by more than 82 per cent during the past year.

Elsewhere, Trinity Mirror issued an unscheduled trading update. The stock hit a record low of 103.75p before closing at 109p, down 42.5p, after the company warned that full-year operating profit will be some 10 per cent lower than market expectations. The company added: "We have seen a marked year-on-year decline in advertising revenues across our businesses during May and June and this is expected to continue for the remainder of the year." Reacting to the news, Landsbanki observed that, given the tone of the update and the uncertainty over the dividend, "the shares will go weaker, notwithstanding the fall in recent days".

The read across in the wider sector was predictably negative and ITV lost 2.8p to 44.7p. Beside Trinity's update, ITV's share price was depressed by news that its Project Kangaroo joint venture had been referred to the Competition Commission and negative comment from Deutsche Bank. "We expect that broadband break-even won't arrive until 2009, due to slower revenue growth and the switch of Friends Reunited to a free model," said Deutsche, reducing its target price for ITV to 48p from 55p.

Overall, the FTSE 100 was up 96 points at 5,625.9. Once again, resource stocks powered the London benchmark as the price of oil touched a new high, past $143 (£71.84) a barrel. The strength among the miners and oil companies offset weakness in the banking sector, which remained low as investors digested last week's analyst predictions of fresh write-downs at Citigroup. The FTSE 250 was also up and gained 41 points to 9,145.8.

On the FTSE 100, BHP Billiton's proposed takeover of rival miner Rio Tinto was back in focus in the mining sector. "Everyone's talking about what would happen if the regulators make the takeover conditional on the sale of some iron ore assets," said one trader, citing ArcelorMittal, the steel giant headed by Lakshmi Mittal, as a likely bidder for any divested iron ore assets. Rival mining giant Anglo American was also cast as a possible buyer and rose by 130p to 3,526p. A note from Merrill Lynch, which re-ignited talk of a possible bid from Vale, the Brazilian miner, also aided the stock.

"Given its discounted valuation we believe that Anglo is currently vulnerable to being acquired," Merrill said. "Although it has several options, we believe Anglo American could potentially be a target for Vale given its stated desire to diversify into coal and recent press reports in Brazil suggest that some due-diligence is taking place." By close BHP Billiton was up 45p at 1920p while Rio Tinto rose by 166p to 6,009p.

On the FTSE 250, Bluebay Asset Management lost almost 12 per cent or 30.25p to 224.75p after Cazenove revised its rating on the stock to "underperform" from "in-line". "The poor fund performance over the last year will have a dampening effect on flows, in our view, which combined with the issue of deferred bonus costs, could leave the company vulnerable to further downgrades," said Cazenove.

In the housing sector, Taylor Wimpey was flat at 62p after confirming discussions with shareholders about a possible placing and open offer to shore up its balance sheet. It also said that it anticipates writing down the value of its land bank and work-in-progress in the UK by about £550m.

In response, Merrill Lynch said it would maintain an "underperform" rating and 70p target price for the stock. "In truth, the industry and the group are NOT out of the woods," the broker said. "This is likely to be the first of a series of write downs from TW, and probably the first of any capital-raising exercises. In the previous cycle the UK housing sector wrote off 30 per cent of its [net asset value] over a period of three years – this is just the start."

Panmure Gordon, which maintains a "buy" rating with a 104p target price for the stock, focused on the possible upside instead. "On a current discount of 58 per cent, the shares are too undervalued," said Panmure.

On AIM, telecoms specialist Thus climbed by almost 22 per cent or 31. 75p to 177p after Cable & Wireless unveiled an improved, 180 per share offer the company. The approach follows an earlier 165p per share offer, which was rejected by the Thus board. By close, C&W was up 3.4p at 150.8p.