Market update - 24 June
Tuesday 24 June 2008
The FTSE 100 was down 56.9 points at 5610.3 points at 11.43am on Tuesday. The FTSE 250 was also down and lost 136.3 points to 9184.3.
Antofagasta was up 8.5p at 653.5p after Credit Suisse upgraded the stock to "outperform" from "neutral", citing higher metals prices. The broker also increased its target price for the stock, to 760p from 600p.
"We expect Antofagasta to perform strongly this year…Even with modest growth across its existing copper, water and transport businesses, strong prices should result in higher revenues. The company also has two attractive longer-term growth projects, Esperanza and Reko Diq, which we believe have the potential to increase attributable copper production by 50% in the medium term," the broker said.
Among the banks, HBOS was up 0.25p to 270.5p, but remained below its 275p rights issue offer price despite some positive comment from Collins Stewart, which said the current price is "discounting some unrealistically negative scenarios".
"Our fundamental view is that the stock is undervalued currently, even with the short-run earnings risk within the business. Our target price of 375p shows material upside though is, in part, driven from 2009E earnings, which show low visibility. Further, we see the long rights issue process continuing to impact so only upgrade to HOLD, for now. When the rights issue closes on 18th July, we hope management will be better-able to improve earnings visibility which will give us greater confidence in our price target," the broker said.
On the FTSE 250, Bradford & Bingley was up more than 10 per cent or 7.25p at 73.25p after the bank rejected a £400m cash-injection proposal from Resolution, an investment vehicle backed by entrepreneur Clive Cowdery.
"Resolution has announced plans to consolidate the smaller banking and lending industry in the UK with a potential £2bn investment over the next two years and has started with an approach to B&B. Resolution wanted B&B to assess its plans but B&B has rejected the approach, stating it would mean a change in control for the group, and is continuing with its own capital-raising plans," said Barclays Wealth, adding:
"While a roll-up model in the UK could have long-term value for the industry, its potential success is a large uncertainty and the negative macro outlook for the UK over the next 12 to 18 months means we retain out Neutral recommendation on B&B. The shares are trading close to our 75p fair value."
Debenhams was up 1.5p at 43.75p after reassuring the market over trading – the company, which has been dogged by speculation about its financial health in recent days, rushed out the trading statement to quell the rumours.
"In the event the trading news is somewhat re-assuring. After 10 weeks of the second half to June 21st like-for-like sales are ahead by 1% (Landsbanki estimate -1.5%) taking the cumulative position to -0.6% 42 weeks into the year. This suggests that the brand has continued to win market share. The guidance on gross margins remains the same which is for a flat to 20 basis point advance – a significant turnaround from the first half trend (Landsbanki estimate +10 bips). The net debt at the year end is expected to be in-line with market expectations. The statement is a positive pointer on estimates and our £130m PBT forecast for this year looks too conservative," said Landsbanki, which kept a reduce rating on the stock.
Punch Taverns continued to trade low, down 25p at 313p, as traders citied mounting concern that the company may breach its debt covenants.
Traders also cited an earlier Morgan Stanley note, in which the broker said that "Punch faces four debt-related obstacles to overcome in the next three years, which will likely continue to weigh on its shares price", and new commentary from Redburn, a small London based broker, as reasons for the share price weakness.
"If we are to assume that the UK enters recession (as seems likely), the stock that continues to cause us concern is Punch Taverns (Sell). Our analysis of Punch's three securitisation structures means that IF WE DO ENTER A RECESSION we think it is almost inevitable that it will trip all three restricted payment clauses, denying the group holding company (and thus shareholders) from accessing any of the cash in the group," Redburn said, adding:
"It is also possible (although not certain) that IF WE DO ENTER RECESSION it will trip the default [debt service coverage ratio or DSCR] covenant on its ‘B’ bond structure in late 2009 or early 2010 (after it has to start paying capital repayments on these bonds), even though the default covenant will fall at that time."
"As such, in these circumstances we think it very likely that Punch will require a recapitalising rights issue sometime before the middle of 2010 - our model assumes a 3 for 2 rights at £3.10 in early 2010."
Elsewhere, fresh housing market data from the British Bankers Association, which revealed that mortgage approvals hit a record low in May, dampened sentiment among house builders and Taylor Wimpey was down 5.79 per cent or 3.75p at 61p.
Howard Archer, chief UK & European economist at Global Insight said the new data heightened "concern that we are in for an extended, deep correction in the housing market".
He added: "This is something that the Bank of England will need to take into consideration when setting interest rates, although inflation development will clearly be the main determining factor of where interest rates are headed - especially pay developments."
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