Tesco recouped some of its recent losses yesterday on hopes that it will announce plans to return cash to shareholders when it files preliminary figures in April.
Tesco shares came under pressure last week after the grocer announced plans to spend £250m a year building a chain of convenience stores on America's west coast. That news unsettled investors for two reasons. First, the US is a graveyard for UK companies and second it ended hopes that Tesco might increase its dividend or launch a share buyback.
However, Swiss broker UBS believes a buyback is still a possibility. It notes comments made by Tesco boss Sir Terry Leahy on a conference call last week. According to UBS, Sir Terry referred to a "store of hidden value" in Tesco's property portfolio that would be discussed alongside full-year results (due April 25).
UBS estimates there is £13bn of freehold property on Tesco's balance sheet that could be undervalued by up to 30%. The broker believes a revaluation might see Tesco strike further property deals. Last year the company realised a profit of £366m from a deal with the Tchenguiz brothers, which saw 12 stores and two distribution centres transferred into a special purpose investment vehicle.
"Although we would not expect a significant share buyback, further property [joint ventures] could give rise to a small amount of cash being returned to shareholders," UBS said. With the Swiss broker repeating its "buy" recommendation Tesco shares edged up 3.5p to 321.75p.
In the wider market, leading shares bounced back from Friday's sell-off. Lifted by strength in heavyweight banking stocks, the FTSE 100 came to rest 29.4 points higher at 5,793.5. Tate & Lyle, up 25p to 616.5p, was the biggest riser as investors woke up to the fact that sugar futures have recently traded at 25-year highs.
Elsewhere, the FTSE 250 added 8.1 points to 9,332.8, while the FTSE Small Cap index firmed 0.7 points to 3,530.2.
Yell Group, owner of the Yellow Pages, provided the day's speculation. Its shares advanced 20.25p to 570p on talk that it could be a takeover target for Google, which is rumoured to be seeking increased exposure to traditional media.
Bid rumours were also swirling around Scottish & Newcastle after Merrill Lynch said the brewer was more likely to be prey than predator. "With its £4.4bn market cap and high free float (89%), S&N remains a viable target for any of the brewing heavyweights, at the right price," the US broker said as it upgraded its rating to "buy" and set a 540p target. S&N shares rose 11.75p to 512p.
Lloyds TSB was in demand again but this had nothing to do with takeover speculation. Its shares improved 3p to 552p, extending their gain since the start of the year to 12.5%, after Deutsche Bank advised clients to "buy" ahead of next Friday's full-year figures. Deutsche analyst John Sheridan said he had also increased his target price to 580p to reflect the improving outlook for Scottish Widows, Lloyds' life assurance division.
Elsewhere in the banking sector, Barclays climbed 9.5p to 651.5p after a bullish write up in Barron's business weekly. The magazine said Barclays shares could rise 15% to 20% over the next 12 to 18 months as investors realise that fears about bad debts have been overdone.
Among the insurers, Aviva rose 12.5p to 751.5p after being tipped alongside the Prudential, up 7p to 598p, by Morgan Stanley in a sector review. "We continue to believe the non-life operations of Aviva are undervalued by the market," the US broker said.
On the downside, Compass Group fell 4.5p to 216.75p unsettled by reports that the frontrunner for its Select Service Partner division, Italian company Autogrill, had been excluded from the second round of bidding because its offer was too low.
Away from the blue chips, Patientline, which provides bedside communications systems for the NHS, firmed 1.25p to 28p after stockbroker Shore Capital revealed an increased holding of 17% and called for an extraordinary general meeting to remove chairman Derek Lewis. It is proposing to replace Mr Lewis with Barclay Douglas, a former Arthur Andersen accountant and Shore Capital director.
Elsewhere, SkyePharma, the drug delivery company, rose 2.5p to 43.75p. After the market closed, Ian Gowrie-Smith, former chairman and non-executive director, declared the purchase of 500,000 shares, taking his holding to 8.78m.
Synchronica, the former Dat Group, rose 0.5p to 34.5p on rumours Emblaze, steady at 132.75p, is running the slide rule over the mobile phone software developer.
NMT, the safety syringe maker turned cash shell, marked time at 62.5p despite news that Volvere, the activist investment group chaired by Sir Stanley Kalms, had increased its holding to 15%.
Instore, owner of the Poundstretcher chain, fell 9.25p to 43.75p after the company was forced to issue its second profit warning in just four weeks.
Of new issues, Cagney, a company run by former Omnicom boss Paul Simons, made a solid debut on Aim. Placed at 8p following a £1.5m fundraising, the shares came to rest at 9.25p. Mr Simons plans to use Cagney as a vehicle to buy small advertising and promotions businesses with a view to creating a fully integrated marketing services group.
Run on JJB Sports
JJB Sports emerged with the best performance in the FTSE 250 yesterday, excited by a flurry of aggressive share buying. Shortly after lunch, several blocks of stock totalling 2m shares were purchased at 185p - a 12p premium to the prevailing share price. Traders said the buying coincided with reports that Permira, the private equity group, had drawn up a list of retailers, including Peter Cowgill, the executive chairman of JD Sports, who could front a bid for the sportswear group.
Analysts noted that any bid would require the blessing of chairman David Whelan, who owns 39% of JJB. Last year, Mike Ashley, the boss of Sports World International, bought and sold a 9.6% stake in JJB, whose shares closed 13.25p higher at 185p last night.