Market report: Monday close

By Mickey Clark for MailOnline
Updated: 12:06 EDT, 3 September 2007

TUI Travel - created by the merger of TUI and First Choice Holidays - has become the latest casualty of the subprime mortgage collapse.

Shares in the package holidays operator opened at a sizeable discount in first-time dealings today. Offered at 302p, they slumped to 285½p. Brokers attributed the poor performance to the apparent lack of confidence among investors because of the credit squeeze.

But the brokers themselves seemed unable to work up much enthusiasm for Tui's prospects either. Morgan Stanley has begun coverage with an equalweight rating and 365p target, while rival Thomas Cook is rated at overweight with a 375p target despite Friday's gloomy comments about current trading. But it claims both companies offer significant margin improvement.

Morgan Stanley insists this would be brought about by a mixture of merger synergies, turning around lossmaking markets, and balance-sheet utilisation. It reckons Tui enjoys strong management and boasts an attractive specialist holiday business.

Thomas Cook, created by the merger of KarstadtQuelle's Thomas Cook holiday division and UK rival MyTravel, remained its top pick as it pointed to a stronger balance sheet and higher free cashf low generation. It believes Thomas Cook, 13p firmer at 299p, can afford a 10% annual share buyback.

Credit Suisse has upgraded Thomas Cook from underperform to neutral, while JPMorgan remains overweight on the tour sector in general.

Tour operators are not without risk, and Morgan Stanley says it will be a volatile two years until the mergers fully deliver, given that the industry has high fixed costs, low margins, and intense competition, and is exposed to external events. MS says the shares could fall a further 30% after their recent weakness.

Share prices generally sported modest gains following a convincing performance by Wall Street on Friday. But with US financial markets closed today for Labour Day celebrations, it never looked as if the London market was going to get into full swing. The FTSE 100 index rose 11.9 to 6315.2 in thin trading.

Among the leaders, Sainsbury's was driven 3p higher to 557p by a revival of speculative buying. This is despite some doubts that the Sainsbury family are willing to approve the terms of 625p-a-share offer from Qatar state investment arm Delta Two - even if it increases the cash element of the offer.

Financials held the high ground among blue-chips with Barclays rising 24½p to 638p. Dresdner Kleinwort has repeated its add rating and 800p target.

Pubs chain operator and brewer Mitchells & Butlers firmed 1½p to 714p. A parcel of 11m shares slipped through on the ticker at 714p late on Friday. Last month the group, which includes the All Bar One and Harvester chains, was forced to delay a £4.5bn property venture with financier Robert Tchenguiz. This would have meant splitting 1300 pubs with £240m of rental from the main group. However, the deal was put on hold following the fallout from the credit crisis.

Tchenguiz is believed to have built up a stake of about 14% in M&B, some of it through contracts for difference. Brokers say Friday's line of stock may have been bought to cover open positions.

Shares of music retailer HMV continued to rally, with the price adding 9½p at 132¾p after Deutsche Bank raised its rating from hold to buy with a 135p target.

Deutsche says that the market is attaching little credibility to new chief executive Simon Fox's plans to stabilise the group and then grow medium-term profits. It adds that any good news could see the HMV share price rise sharply.

TAKING STOCK: Market news at-a-glance

Banking & finance
Financial administration specialist PayPoint has signed a deal with Coinstar E-Payment Services to roll out an electronic gift card programme for Pay-Point retailers at more than 17,000 outlets across the country. The companies expect to roll out the programme to retail sites during the second half of the year.

Building & property
Specialist property company A&J Mucklow converted to a real estate investment trust bank in July. The group reports pre-tax profits for the year to 30 June on Wednesday. They are expected to have grown from £12m to £17.8m. Arden Partners says Mucklow is now seeing rental levels improve.

Consumer
Lehman Brothers has downgraded Cadbury Schweppes from overweight to equalweight and slashed its target from 725p to 600p. The broker expects a lower price for the sale or demerger of its US beverages division, which had been priced at £7bn. The Creme Egg and Dairy Milk side has also suffered higher costs.

Engneering
New Airbus chief executive Thomas Enders plans to restructure the planemaker's board. Enders, who took the helm of Airbus a week ago, wants to reduce 'significantly' the current 12 board members. He also intends to be Airbus's sole representative on the management board of parent company Eads.

Health
Dechra Pharmaceuticals is set to deliver a solid performance tomorrow with revenues having grown by around 9% year-on-year. The veterinary drugs group is expected to post interim pretax profits of £12.7m, up from £11m last year. US clinical trials for Vetoryl, Felimazole and Equidone remain on target.

Industrials
McBride warned in July that profits for the year to June would fall short of expectations. The provider of private-label household and personal care products blamed the weak end to the year's trading. Goldman Sachs is forecasting a rise in pre-tax profits from £25.9m to £29.6m on Friday.

Leisure
A surge in the number of people playing five-a-side football has sent profits soaring at Goals Soccer Centres. The company today said pre-tax profits were up 47% to £2.1m in the first six months of the year after a 31% rise in sales to £9.7m. Goals attracts some 80,000 footballers a week to its 23 sites.

Media
Virgin Media has asked head hunters Spencer Stuart to find it a new chief executive despite uncertainty with the cable company under takeover threat. The move follows last month's surprise departure of Steve Burch, who was chief executive for 19 months and oversaw the takeover of Virgin Mobile and rebranding of NTL to Virgin Media.

Natural resources
Copper miner Kazakhmys is expected to report that profits have risen to $1.28bn (£636m) from $1.08bn during the first half when it reports tomorrow. This will have been achieved with the help of higher metal prices. Brokers will also focus on cost pressures and whether the company plans acquisitions.

Retail
Selfridges has boosted sales and profits even before the opening of its muchhyped Wonder Room in its Oxford Street flagship store. Profits jumped by a third to £65m while sales were up 11% to £597m in the year to the end of January. The upmarket Wonder Room luxury-gifts department opens today.

Support services
City recruitment firm Robert Walters warned today of a chronic shortage of skilled professionals. Chief executive and founder Robert Walters said: 'In 29 years I have never seen anything like it. Fewer people want to work 80-hour weeks and become lawyers or accountants.' First-half profits rose 44% to £11.5m.

Technology
Financial Objects supplies software solutions to the wholesale banking, and wealth management markets and reports interims on Wednesday. Evolution says it will not have suffered from the subprime loans crisis. In fact, the crisis may have enhanced its reputation. The broker is forecasting pre-tax profits of £2.8m for the year.

Telecoms
BT now has more than fourm customers signed up to its broadband service. It had just 172,000 in 2002, and has taken on more than 2000 a day since then in fiercely competition with BT, Virgin Media, BSkyB, Tiscali and Carphone Warehouse. BT said Britain has overtaken Japan, France, Germany and US in broadband penetration.

Transport
Boeing and Airbus executives were today fretting over reports that British Airways is considering giving its long-awaited $15bn (£7.5bn) aircraft order to both companies, rather than opting for just one. The deal would be split between 787 and A350 planes. Boeing's 787 is lightweight and the company says it uses less fuel than the A350.

Utilities
Italian power generator Enel will produce lower first-half operating results tomorrow because of weaker generation volumes and lower prices. Net profits are expected to bee1.87bn (£1.27bn), down from e1.97bn, because of a series of positive extraordinary items booked in the second quarter of last year.