Market Report: Next set to benefit from expansion, says broker

On a day when blue chips were in retreat, Next not only bucked the negative trend, but also registered a healthy rise, gaining 18p to 1,542p, after Investec Securities urged investors to buy into the retailer before its interim results next month. Next will put out its first-half figures on 15 September and the South African broker is convinced they will show that the group has weathered well the difficult trading conditions on the high street.

Investec said: "In spite of weak sales, we believe tight cost control and stable margins will enable management to almost maintain profits compared to last year." It forecast Next to post a pre-tax profit of about £161m, compared with £165m in 2004. And the broker expects strong growth from the retailer going forward. Not only does it predict that conditions on the high street will improve during the second half of Next's year, but Investec also forecasts the company to start cashing in on its substantial expansion programme.

Given these prospects, Investec is surprised to see Next trade at a discount to its blue-chip retail peers and predicts that this gap will soon close. Meanwhile, the FTSE 100 fell 29 points to 5,292.

O2 was again a major talking point. Traders returned to the mobile phone group in a big way, sending it 4p higher to 146.75p, on hopes Deutsche Telekom will bid for the company alone. The latest speculation has been prompted by German media reports that Deutsche Telekom remains interested in a possible acquisition of O2 even after talks with the Netherlands' KPN about a joint purchase failed.

Elsewhere in the telecom arena, Vodafone added 1p to 151p as Dresdner Kleinwort Wasserstein argued that the recent merger and acquisition activity in the sector highlights just how much value there is to be found in the industry. It singled out Vodafone as its favourite and tipped upcoming subscriber numbers from the group's operations in Japan as a possible catalyst for the jump in the stock. Dresdner said: "A change in sentiment about the group's Japan unit could be very positive for the company." The division accounts for 10 per cent of total earnings.

Royal & SunAlliance dropped 2.25p to 94.25p as analysts played down the likelihood of a bid for the insurer. Bear Sterns takes the view that a buyer for RSA will not emerge until the company has sold its troubled US business.

Rank gained 1.5p to 274.5p as ABN Amro argued that the leisure conglomerate could see its shares rise to 355p if the company were to gear up its balance sheet. Basically, the Dutch broker believes Rank has too little debt and suggests the company could be in a position to return up to £750m of capital to investors if it were to increase its borrowings.

Rank has long been tipped as a perfect target for a private-equity buyer because it has little in the way of debt and a significant asset base. But were the group's management to take ABN's advice, its shareholders would enjoy some of the benefits that a private-equity bid would deliver without selling the company.

Paragon gave up 7p to 481p as UBS scaled back its rating on the specialist mortgage lender to "neutral" from "buy". The Swiss broker fears there is little further upside in the stock following its recent jump. Paragon shares have registered a 15 per cent rise since the start of the year.

BTG went 11.25p higher to 200p after the intellectual property group's management held a bullish meeting with brokers in the City. There is growing hope among those who hold the stock that in the coming months BTG will unveil a raft of positive newsflow from its portfolio of products. At the last count, the group had more than 100 products under development.

Mothercare added 4.75p to 320.75p following the purchase of 7,500 shares at 319p by Ian Peacock, the retailer's chairman. He now holds 137,000 shares. Cardpoint, steady at 140.5p, witnessed some heavy director share sales. Mark Mills, the chief executive of the cash machine operator, led they way via the disposal of 750,000 shares at 138p. Chris Hanson, the group's chief operating officer, sold a more modest 250,000 at the same price. Cardpoint, founded by Mr Mills in 1999, has seen its shares perform well following its recent purchase of rival Moneybox.

Europasia Education ticked 0.10p higher to 1.05p on news of record profits at one of its Chinese investments. The group is an investor in educational collages in Europe and Asia. Crosby Capital improved 5p to 61.5p on hopes the Asia-focused investment boutique will soon announce further deals in either China or Japan. Earlier this year, Crosby registered a handsome profit from its investment in the Japanese conglomerate IB Daiwa.