Market update - 29 August

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The Independent Online

The FTSE 100 was up 22.2 points at 5623.4 and the FTSE 250 was up 90.6 points at 9362.3 at 11.50am today. Bradford & Bingley was down 1.75p at 48.5p after posting interim results, which Collins Stewart said were “were little short of appalling”. “Looking forwards, guidance is for margins to continue falling and [for] arrears [to] continue rising. Earnings outlook is therefore very weak. The margin issue is both the lack of ability to write new business currently available at higher margins, at least in part due to funding constraints, in our view,” the broker added.





Pali International also weighed in on the results, noting that it was “difficult to know just how long this bank can limp onwards and downwards, given that the large UK banks have been nice enough to sub underwrite some of the £400m rights issue.”.

“None has shown an interest in wanting to buy the bank outright, as far as we know, despite the -82 per cent share price fall in the year to date,” the broker added.



Moving up



The B&B numbers failed to dent the wider financial sector, however. Leading stocks supplemented last night’s gains and HBOS was up 8.75p at 314.25p as the London market looked set to end the week on a high.



Mid-cap metals & mining group Aricom jumped 10.18 per cent or 4.25p to 46p after announcing the completion of a titanium sponge joint venture with China’s Chinalco.



Positive interim results helped JKX Oil & Gas advance to 430.5p, up 24.25p. The same was true for Dana Petroleum, which gained 87p to 1477p.



AVEVA, the FTSE 250-listed engineering software group, was up 57p at 1461p after Cazenove upgraded the stock to “outperform”.

“We have examined the risks to AVEVA’s organic growth stemming from Asian shipyard exposure in light of recent commentary, and conclude that the incremental investment levels remain robust, planning assumptions continue to anticipate further capacity expansion, and that AVEVA's structural growth drivers retain strong upward momentum. We upgrade our estimates and recommendation due to our confidence in end market momentum and in view of the powerful intrinsic operating leverage in the business,” the broker said.



Moving down



Bearish broker comment bore on Enterprise Inns, which slid back to the bottom of the FTSE 100, down 12.5p at 302.25p after Credit Suisse initiated coverage on the stock with an “underperform” rating in a new sector review. The broker applied the same rating to Punch Taverns, which was trying to remain in the black, up 1.5p at 285.75p.



“We expect this to be the first time that the tenanted pub company model is tested under a protracted downturn scenario. Lessees, who are operationally highly leveraged, are likely to seek more rent support from the tenanted pubcos [pub companies]; for this reason, we have removed the RPI [retail price index]-linked rental growth from our 2009 and H1 [first half] 2010 estimates. Scenarios of (1) big declines in beer sales (7-10 per cent p.a. over 2009-10) and (2) significant numbers of tenants (20 per cent of pubco estates) seeking rental support (£20m-30m p.a. in excess of our estimates) could see Punch and Enterprise breaching their debt covenants,” Credit Suisse said, adding:

“The likely decline in tenant and tenanted pubco profitability will, we think, impact the valuation of the pub estates. The implied multiples on the property valuations on pubcos’ estates were at historical highs at their most recent appraisals. While we do not expect a P&L [profit & loss] impact as there is considerable room to historical costs, a decline in estate valuations would limit the pubs’ leverage capacity.”

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