Market update - 10 February

The FTSE 100 was 27.76 points behind at 4279.85 while the FTSE 250 eased to 6569.89, down 89.79 points, at around 12:10 pm.

British Airways swung to 149p, up almost 7 per cent or 9.7p after Merrill Lynch added the stock to its widely followed “Europe 1” list of attractive shares

“We think [the] combination of BA’s low valuation and more positive newsflow over the next 12 months could provide significant upside for the shares,” the broker said,

“This newsflow could include potential upside from mergers & acquisition activity (a merger with Iberia and a joint venture with American Airlines) and lower operating costs (including labour and a decline in fuel costs reflecting lower hedging).”

Merrill also expressed its confidence in the airline’s balance sheet, saying that recent results has “provided reassurance” on certain key financial metrics.

“This included £4.6bn in liquidity (significant cash balances amounting to £1.6bn as at the end of December, no significant refinancing risk of covenants and committed facilities for new aircraft and general purposes totalling £3.1bn),” the broker added, playing down the risk of a possible credit rating downgrade.

“In reaction to BA’s recent trading update, Standard & Poor’s announced last week that it had placed its ratings on credit watch with negative implications (currently [the] corporate rating [is] BBB-minus – the lowest investment grade – and [the] senior unsecured debt [rating is] BB-plus – one step below investment grade). A downgrade to BA’s rating would have no negative implications for BA’s committed debt facilities.”

Moving up

In other broker driven news, Firstgroup, up 2.46 per cent or 7.25p at 302.25p was lifted by a JP Morgan upgrade.

“We are moving [Firstgroup] to overweight and would be actively building a position here,” the broker said,

“With dividend yield support and strong base case and scenario upside, this share looks oversold in our view. The greatest risk to our rating is if Greyhound [the US division] fails to generate profits in line with company targets.”

Sub-prime lender Cattles continued to rally, gaining another 9.3 per cent or 1.5p to 17.7p after Evolution Securities weighed in with a “buy” note, saying that company’s focus on cash generation “means it is more likely than not that Cattles will succeed in refinancing its 2009 debt”.

“The company will release its 2008 results on the 26th of February, which will likely be in line with consensus [expectations] of 24.8p. The key issue is whether management have made any progress on refinancing discussions for the £635m of syndicated bank loans due in 2009 (£500m in July and £135m in December) – management guidance is that they would look to achieve this by the end of the first quarter of 2009, but we expect them to give a strong indication of progress on the 26th of February,” Evolution analyst Hugo Mills said.

Moving down

The mining sector fell back as investors banked profits from a week of gains, with Kazakhmys – one of the strongest blue chips in recent days – losing almost 8 per cent or 24.75p to 296.75p.

Xstrata was close to 6 per cent or 45.5p behind at 749p while Anglo American lost 79p to 1423p.