Market Report: Yell races ahead as broker eyes recovery
Saturday 16 January 2010
Hopes of economic recovery underpinned gains by the directories group Yell, whose share price strengthened yesterday despite a lacklustre day on the markets.
UBS said Yell's stock was set to draw steam from company's attempts to repair its finances last year. Yell has lagged behind its peers despite tackling debt levels that "threatened to wipe out equity holders", the broker explained. Its analysts argued that, with less volatile shares, a more comfortable financial position and the possibility of pent-up demand for the shares given that the refinancing took place so late last year, this underperformance should reverse in early 2010.
The coming months should also see Yell's revenues recover because, while trading remains tough, particularly in the US and Spain, closely correlated data tracking confidence among small businesses has been improving and should feed through to Yell's top line.
Though its longer-term forecasts remain conservative – UBS continues to assume structural declines in most of Yell's business – the broker raised its medium-term earnings estimates by more than 40 per cent.
The broker also switched its stance on Yell's shares to "buy", saying that the company's cyclical recovery was underestimated. The move helped the stock rally by 3.5 per cent, or 1.3p, to 38p despite weakness in the wider market.
Overall, the FTSE 100 fell 42.83 points to 5,455.37 and the mid-cap FTSE 250 index shed 29.83 points to close at 9,538.2. The losses were pinned on the expiry of various futures and options, and on a read-across from Wall Street, where the banking giant JP Morgan Chase issued results that beat profits forecasts but fell short of market expectations in terms of revenues. Equities in the UK and US were also knocked by the latest Reuters/University of Michigan consumer confidence index – a widely followed gauge of the mood among US consumers – which did not rise by as much as expected.
The index climbed to 72.7 for January, compared with a revised 72.5 reading for December. Economists had expected the gauge to rise beyond 73 this month.
On the Footsie, International Power stood out and advanced by 12.6p to 322p amid renewed speculation about the chances of a bid from France's GDF Suez. The rumours have done the rounds many times before and were heavy in December, with traders chatting about the possibility of a bid before the year was out. When nothing materialised, hopes faded at Christmas. Last night, traders remained cautious and cited the dubious record of rumours that surface on a Friday.
Elsewhere, the banking sector was unsettled as traders scrutinised the results from JP Morgan. HSBC, which was upgraded from "hold" to "buy" at Deutsche Bank, fell 12.1p to 702.5p and Standard Chartered lost 14.5p to close at 1551.5p. Also held back were Lloyds, which declined by 0.72p to 56.78p, and Barclays, which fell 7.45p to 311.2p. But Royal Bank of Scotland managed to remain positive, rising 0.74p to 36.74p.
In the wider financials sector, bid rumours continued to support the insurance group Aviva, which gained 5.1p and closed at 419.8p. Besides being mooted as a possible target for the tycoon Clive Cowdery's Resolution investment vehicle, Aviva's stock was also boosted by positive broker comment, with analysts at Execution initiating coverage with a "buy" stance.
"Management actions initiated in the second half of 2009 to restructure Aviva's business units should begin to bear fruit in 2010," the broker said. It added that, given the level of inefficiencies it had identified, it expected "at least a £200m upgrade to the current cost-savings programme".
On the downside, oil issues were unsettled, with Royal Dutch Shell ended 12p lower at 1848p and BG lost 5.5p to finish on 1216p as crude prices eased in response to the International Energy Agency's latest forecast for demand, which was largely unchanged despite expectations of an upward revision.
Miners, however, were worse off, with Kazakhmys falling 40p to 1410p, Xstrata declining by 31.5p to 1188.5p and Lonmin losing 46p to end on 1976p.
Further afield, the newspaper publisher Trinity Mirror fell 3.9p to 165p after UBS revised its stance on the stock from "buy" to "neutral" and cut its target price from 220p to 185p.
The broker said that, having been one of the media industry's star performers last year, Trinity now lacked catalysts for earnings upgrades or a re-rating. "We believe that as investors take risk off the table and turn to focus on solid, structural growth stories in the sector, Trinity Mirror is unlikely to fit the bill," UBS explained.
It also weighed in on Trinity's rival Johnston Press, which closed 0.5p weaker at 26.75p after UBS sounded a note of caution on the regional newspaper publisher's balance sheet.
"It remains unclear how the £85m debt repayment to avoid incurring higher interest rates will be funded, and equity issuance cannot be ruled out," the broker said, scaling back its target price to 27p.
"On the flip side, we believe 2010 could see Johnston's pension deficit, which currently represents about 40 per cent of the market capitalisation, decrease given rising gilt yields and hence falling liabilities."
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