Market update - 27 August

The FTSE 100 was down 15 points at 5455.7 and the FTSE 250 was down 96.1 points at 9037.5 at 12.02pm today. Taylor Wimpey was down 5.29 per cent or 2.75p at 49.25p after the house builder revealed a slump in pre-tax profits and said that, contrary to trade press reports alluding to a deal on its debt, it was still in discussions with lenders.

Reacting to the announcement, Citigroup said the share price is likely to remain under pressure until the debt issues are resolved.

“Very challenging markets in the UK, US and Spain have resulted in a sharp fall in profits as expected. PBT [per-tax profit] of £4.3 million was below our expectation of £53.5m. UK margins fell to 5.5 per cent on volumes of 6,317 units. US margins fell to 4.8 per cent on volumes of 2,094. Group performed worse than we were expecting in the UK,” the broker said.

Moving up

G4S, up 4.37 per cent or 9.25p at 220.75p, was the strongest on the FTSE 100 after positing forecast beating results.

Petrofac, at second place on the FTSE 100, also drew strength from its results. The oil services group gained 25p to 617.5p after revealing a 49 per cent hike in first half revenue, to $1.576bn, and a 57 per cent increase in net profit, to $121.2m.

After returning from the results presentation, Cazenove said:

“Management confirmed strong execution on its backlog of profits and confirmed its guidance of 9-10 per cent net profit margins for the Engineering & Construction division.”

“While questions were asked about the lack of margin improvement relative to Petrofac’s competitors, these are sector leading margins for turnkey contractors and continued delivery at these levels is more than good enough for us. Management also pointed out a bidding pipeline in 2009 [which is] even better than this year.”

Moving down

Enterprise Inns was down 21.25p at 300.25p after Cazenove downgraded the stock to “underperform” from “in-line”.

“Third quarter data from ETI’s Unique subsidiary, which accounts for 46 per cent of its pubs, shows a marked deterioration; net income from beer sales fell by 8.4 per cent in the quarter. This is in contrast with ETI’s robust performance in the first half when EBITDA [earnings before interest, tax, depreciation and amortisation] was held flat. We had taken this as reassurance that ETI was outperforming the weak on-trade beer market but the third quarter data and trading update from July suggest otherwise. We have therefore reduced our 2009 forecasts by 9 per cent to reflect the ongoing weakness in the beer market and consequent pressure on licensees,” the broker said, adding:

“From a balance sheet perspective, in order to enable Enterprise to convert to a REIT [real estate investment trust], we believe that it will have to accelerate the pace of asset disposals or tap its securitisation. If not, there is a potential for cash to become trapped in its securitisation in 2011. We do not share the view that it is inevitable that ETI will breach covenants, but…. its free cash generation is finely balanced with the cash outflows required by the REIT regime.”

On the FTSE 250, Michael Page was down 1.5p at 347.75p after the Takeover Panel said that Adecco must announce a firm intention to make an offer by 5:00pm on 30 September, or walk away from the UK staffing group for at least six months.