Market report: Capital fears weigh on L&G ahead of results

By Nikhil Kumar
Wednesday 25 March 2009 01:00

Legal & General was under pressure last night, with nervous investors banking profits ahead of the company's full-year figures, which are due this morning.

The life insurer's shares, which have rallied strongly in recent weeks, tumbled to 42.8p, down 4.6 per cent or 2.1p, as the market awaited details on the strength of the company's capital base. ING, which reduced its target price for L&G to 34p from 77p, aided the decline, warning investors about the possible impact of weaker equity markets and the deteriorating outlook for UK life sales.

"New business sales [this year] will be much tougher for Legal & General, we believe, than its UK peer group," the broker said. "On top of this, the company, on our work, struggles to generate real cash. All of this means that the company appears to be more fully valued at current levels than its UK competitors."

Weighing in on the results, ING reiterated a view that has been aired in the market in recent sessions, namely that the company should cut its dividend to ease the strain on the poor cash generation that afflicts the business. Yet, despite its view, the broker said L&G may stick with the payout in an attempt to divert the market's gaze from its "singularly challenging situation".

This last point was questioned by some in the market, who highlighted the example of Aviva, which endured a brutal sell-off after opting to maintain its payout. Cutting the dividend may be a more effective way of soothing frayed nerves, some said.

"A scrip alternative could be introduced to get around all this, and we note that the company does not currently have a scrip alternative to the cash," ING added.

Overall, profit-taking was also in evidence in the wider market, with the FTSE 100 retreating 41.3 points to 3,911.4 as investors moved to secure gains from Monday's session.

The heavily weighted mining sector proved the biggest drag, with the copper producers Antofagasta, down 8 per cent or 45p at 516p, and Kazakhmys, down more than 6 per cent or 26.5p at 375.75p, buckling under as prices for the industrial metal eased off the previous session's highs.

On the upside, a clutch of consumer stocks fared well, with Diageo rising to 767.5p, up 15p, after S&P Equity Research moved its recommendation to "hold" from "sell" and J Sainsbury climbing to 330.75p, up 10.2p, ahead of a trading update, which is due this morning.

Reed Elsevier was also strong, gaining 15p to 518.5p after the Royal Bank of Scotland upgraded the stock to "buy", saying that, despite the depressed valuation, the publishing group's current "asset portfolio is of a higher quality than ever".

The broker reiterated its "hold" stance on Thomson Reuters, which was up 14p at 1,587p.

Elsewhere, the FTSE 250 was 12.3 points firmer at 6403.5. UBS boosted Northern Foods, the food producer, which swung to 44p, up 11.3 per cent or 4.5p, after the broker upped its stance to "buy".

Anticipating another "steady as she goes update" when the company posts a fourth-quarter trading statement tomorrow, UBS commended, among other things, the food producer's relatively strong balance sheet and the identified cost reduction opportunities.

Regus, up 2.75p at 69p, was similarly supported by some benign broker comment. Goldman Sachs weighed in, moving its target for the stock to 80p from 66p on account of the office space provider's strong cash flow.

There was little love for Greene King, on the other hand, after Altium moved the stock – which closed 3.6 per cent or 16.5p lighter at 441.25p – to "hold" from "buy" in a new sector review.

DSG International was also on the back foot, easing to 19.5p, down 0.5p after Morgan Stanley highlighted the long-term competitive disadvantage posed by the fact that the company is tied to store leases where – owing to the possibility of "upward only" rent review clauses – rent may not come down in line with the market. This could potentially give Carphone Warehouse, which is planning to expand via its Best Buy joint venture, the upper hand as it secures cheaper selling space in the years ahead.

"As yet, it has opened no stores and (as far as we are aware) has not even committed to any leases," Morgan Stanley said, highlighting the fact that when the joint venture does begin to roll out into the market, it will be mostly unencumbered by legacy space. At the close, Carphone Warehouse was 2.25p stronger at 121.25p.

Among smaller companies, Innovation, the specialist outsourcer, advanced to 7.41p, up more than 72 per cent or 3.1p after revealing an indicative 15p-a-share approach from the private equity firm Carlyle.

The proposal, which is currently at a very preliminary stage, follows the company's announcement late last year that it had received, and decided not to pursue, a number of possible offers, including one regarding a potential stake investment, in the range of 15p to 20p a share.

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