Market Report: TUI travels higher as bargain hunters move in

TUI Travel sailed ahead as bargain hunters, undeterred by the recent profit warning, piled in last night.

Earlier this week, the tour operator warned that full-year profits would be at the lower end of expectations, as UK trading suffered in the wake of the Icelandic volcanic ash, the run of good summer weather and the post election uncertainty among consumers. The shares duly fell back, with TUI closing at 190p on Wednesday. But they switched course and rallied by 4.5 per cent or 8.6p to end the week at 201.2p after Goldman Sachs said that, while it may have faced a challenging summer, recent declines meant that TUI's shares were now trading on "compelling" valuation multiples. The same was true of Thomas Cook, which rose by 0.4p to close at 176.9p last night.

Urging investors to "look beyond the rear view mirror", the broker highlighted the fact that, in year-on-year terms, winter bookings were currently flat at Thomas Cook and up 3 per cent at TUI. "In addition, our economists forecast a decline in UK unemployment, with which holiday bookings are strongly correlated," Goldman explained, upgrading both stocks to "buy", albeit with lower target prices to reflect the current weakness in trading.

Overall, the markets were broadly unchanged, though once again, the blue chips outperformed their mid-cap peers. The FTSE 100 was 9.38 points higher at 5,275.44 at the close, while the FTSE 250 was slightly lower at 9,782.31, down 6 points, as equities struggled to find direction.

Aviva was the strongest of the blue chips, drawing steam from reports of an approach from sector peer RSA, which was said to have expressed an interest in buying the former's general insurance operations. Aviva, which closed at 387.4p, up 20.1p, was reported to have rebuffed approach from RSA, which was 1.1p behind at 127.4p at the end of play. The news stoked hopes of deal activity in the wider insurance sector, with Standard Life climbing to 209.8p, up 6.1p, and Legal & General rising by 2.85p to 90.75p.

Elsewhere, Cairn Energy rose by 15.5p to 468.3p amid signs that it was close to striking a deal to offload the bulk of its stake in Cairn India. Vedanta Resources, down 128p at 2,053p, was locked in advanced talks to acquire a controlling stake in the Indian business. The wider mining sector was also broadly lower, with weakness on the commodity markets weighing on sentiment. Kazakhmys, for instance, was 14p behind at 1,156p and Xstrata lost 11.4p to 995.6p. The Eurasian Natural Resources Corporation was also lower, shedding 9.5p to 921.5p.

Back on the upside and Intercontinental Hotels rose by 19p to 1,073p after JP Morgan Cazenove issued some words of support, arguing that the recent pullback in the hospitality group's shares offered a buying opportunity. "The only negative from the [recent] half yearly results was that net room additions are expected to be 'modest' in 2011, even though the pipeline remains strong at 197,000 rooms," the broker said, repeating its "overweight" recommendation. "This seems to be the natural consequence of financing constraints resulting in tighter industry supply conditions in 2011, the clear benefit of which should be [faster growth in revenues per available room]."

JP Morgan also aided Imperial Tobacco, which was 25p ahead at 1,850p after the broker highlighted the fact that, despite the shares falling behind the wider market in the year to date, earnings estimates for the cigarette maker have remained robust. Though it held back from recommending that investors buy the stock, the broker said the current valuation failed to reflect the "merits of tobacco companies in the current, uncertain economic environment".

Further afield, Drax, the owner and operator of the Drax coal-fired power station, was among the strongest of the mid caps, adding 10p to 388.9p after HSBC lured the bulls. "Only one third of analysts currently rate Drax a 'buy'," the broker said, arguing that while the stock had been "overly penalised" for negatives such as the growing role of new power sources such as wind, it was failing to reflect the fact that "a mechanism needs to be found sooner rather than later to remunerate the (currently) free back up 'option' value of reliable thermal generation".

Dana Petroleum rose by 47p to 1,677p amid hopes that the Korean National Oil Corporation, which has had little luck with its indicative offer proposal of 1,800p per share, might attempt a hostile bid for the oil exploration and production group.

Analysts remained cautious though, with Evolution Securities, which maintains a "sell" recommendation on the stock, saying that, "barring KNOC going hostile or major shareholders pressuring Dana to the negotiating table, the risks look increasingly weighted to the downside".

Citigroup also expressed concern about the possible downside in Dana's share price if a formal offer is not forthcoming. Further, the broker, which maintained its "hold" view and 1,655p target price, said it was "increasingly concerned by the prospect of KNOC losing interest in the Dana assets".

FTSE 100 Risers

Barclays 317p (up 7.45p, 2.4 per cent)

Recovers as bargain hunters move in to capitalise on Thursday's weakness.

BP 416.4p (up 6.35p, 1.6 per cent)

Rises after saying it has completed a pressure test on the blown-out Gulf of Mexico oil well.

British American Tobacco 2,253p (up 20.5p, 0.9 per cent)

Defensive attributes continue to attract interest amid uncertain macro outlook.

FTSE 100 Fallers

Randgold Resources 5,510p (down 85p, 1.5 per cent)

Comes under pressure as traders bank profits from recent gains.

African Barrick Gold 549p (down 8p, 1.4 per cent)

Like Randgold Resources, falls back as profit-taking weighs on sentiment.

BAE Systems 309.1p (down 3.6p, 1.2 per cent)

Falls after UBS revises its recommendation to "neutral" from "buy".

FTSE 250 Risers

Aquarius Platinum 256.1p (up 3p, 1.2 per cent)

Bank of America Merrill Lynch cuts target to 450p, but sticks with its "buy" stance.

Connaught 16.47p (up 0.39p, 2.4 per cent)

Bargain hunters, seeking to capitalise on recent losses, continue to pile in.

ITV 50p (up 0.2p, 0.4 per cent)

Gains ground as UBS reiterates its "buy" recommendation following a recent credit rating upgrade.

FTSE 250 Fallers

De La Rue 708p (down 3.5p, 0.5 per cent)

Remains under pressure after recent news of the chief executive's resignation.

Go-Ahead 1,095p (down 6p, 0.5 per cent)

Goldman Sachs revises its target price to 1,087p, compared with 1,500p previously.

Ferrexpo 289.2p (down 0.8p, 0.3 per cent)

Retreats amid profit-taking against the backdrop of quiet commodity markets.