Market Report: Diageo held back by profit-seekers

The FTSE 100 enjoyed a strong session last night, but Diageo was unsettled, missing out on the rally amid a round of profit-taking.

Notwithstanding the drinks giant's strengths, Evolution Securities, which switched its stance on the stock to "neutral" from "add", said the share-price valuation gap with the wider beverages sector had largely closed, with stocks in other consumer sectors offering better value.

ING also weighed in on the shares, changing its rating to "hold" from "buy". "Share-price support for the dividend yield (now 3.9 per cent) has been reduced and free cash-flow yield (6-9 per cent for 2009-11) is below average in beverages," the broker said, trimming its target price for the stock, which touched a session low of 928p, before closing 3p weaker at 939.5p, to 956p from 970p.

Further afield, Soco International, the FTSE 250-listed oil and gas exploration and production group which is set to begin a 12-month drilling campaign targeting reserves in Africa and Vietnam, was in focus amid rumours of bid interest from China.

The company, which has been the subject of takeover chatter numerous times in the past, declined to comment on speculation that it had been approached regarding a possible bid. There was little detail on the price, although rumours suggested a significant premium may be in prospect. Not everyone was convinced, however, with some in the market doubting that Soco, which closed 3.2 per cent or 40p higher at 1,310p, would be subject to an offer at this stage.

The sceptics found support in a recent UBS circular, in which the broker, weighing in on the group's interim results, said deal activity was more likely next year. "Soco announced an approach for its assets in October 2008. Whilst there has been no update since then, we believe M&A [mergers & acquisition] potential still persists," UBS analyst Rohit Agarwal said in a note published last week.

"However, following the results, we believe management are keen to unlock the Vietnamese upside, with the E prospect in particular, before any sale. Since the E prospect is only being drilled in 2010, M&A is also more likely a 2010 prospect in our view."

Overall, the FTSE 100, which closed 1.4 per cent or 66.91 points higher at 4,756.58, was strong, with traders piling in to capitalise on the weak run earlier this week. The mid-cap FTSE 250 index also enjoyed a positive session, rising by 1.9 per cent or 161.11 points to 8,531.36.

As in so many recent sessions, the benchmark index was buoyed by the heavily weighted mining sector, which charged ahead as metals prices gained ground. The copper miner Antofagasta led the way, rising by 5.3 per cent or 38p to 756p, while the Xstrata rose to 810p, up 5 per cent or 38.5p and the platinum miner Lonmin registered a rise of 4.1 per cent or 56p to 1,440p. Further afield, the oil and gas majors were also firm, with Royal Dutch Shell climbing to 1614.5p, up 1.6 per cent or 26.5p, and BG climbing to 1045p, up 1.9 per cent or 19p.

WPP was the best performing blue chip of the day, rising by 7.3 per cent or 34.4p to 507.5p as investors looked ahead to the advertising group's interim half-year statement, which is due to be published next week. Nomura played down the chances of an equity issue, noting that recent bond issues had eliminated any short-term refinancing pressures.

"If, as we expect, WPP can demonstrate that the balance sheet is secure and that organic revenue growth and margin performance is broadly in line with peers in the first half, there remains considerable scope for the rating discount to close," the broker said, sticking to its "buy" stance ahead the results.

Elsewhere, the banking sector drew strength from improved sentiment in the wider market, with the Royal Bank of Scotland vaulting to 47.7p, up almost 4 per cent or 1.77p. State-backed peer Lloyds was also on firm footing, gaining 2.6 per cent or 2.53p to 101.25p. Barclays advanced to 348.9p, up 1.1 per cent or 3.9p.

On the second tier, Barratt Developments advanced to 240.9p, up 9.5 per cent or 20.8p, as the housing sector perked up on news that the mortgage approvals rose again last month, albeit from a depressed base. In the wider sector, Bellway was 1.6 per cent or 13p ahead at 823p, Redrow advanced by 4.8 per cent or 9.6p to 209.1p and Taylor Wimpey closed 7.5 per cent or 3.2p stronger at 45.9p.

Also on the upside, the staffing group Michael Page International gained 5.2 per cent or 16.2p to 326.2p after ING abandoned its negative stance, upgrading the stock to "hold" from "sell" on account of indications that the "worst appears to be over in terms of earnings risk".

"Although earnings risk has not faded given Michael Page's strategy of keeping the network and sales force more or less in place in order to be a winner in the upturn, which we absolutely endorse, its earnings power is likely to be even higher than out of the previous downturn and there is an option value in the form of a potential further VAT refund," the broker said, rising its target price for the stock to 300p from 120p.