Market report: Monday close

By Mickey Clark for MailOnline
Updated: 12:07 EDT, 10 September 2007

The imminent sale of Southern Water by Royal Bank of Scotland could signal a new wave of buying for the three remaining large water utilities.

Southern is expected to fetch about £4bn for RBS when it finally goes under the hammer in a few weeks' time, and that is certain to focus attention back on the rest of the sector, according to Credit Suisse, which favours Kelda, the old Yorkshire Water.

Kelda shares rose 13p to 852p today, but they are trading well below Credit Suisse's target of 881p. Kelda has underperformed the rest of the water sector recently as bid speculation ebbed out of the price. The broker reckons Kelda's share price would be the most responsive of all the water stocks if Southern achieves a high premium.

Kelda has a history of regulatory outperformance and would require only £1.3bn of leverage for a successful takeover. Credit Suisse reckons it is the most obvious takeover candidate and would probably attract offers of around 1057p.

United Utilities fell 1½p to 662½p despite speculation that Asia's richest man, Li Ka-shing, is lining up a £1.5bn bid for the group's electricity distribution business being, which used to trade under the name Norweb. Li, who also owns Hong Kong-based conglomerate Hutchison Whampoa, is reckoned to be among several potential suitors preparing first-round offers for the network, serving 2.2m customers in north west England

Shares generally traded nervously within a narrow range, with investors growing increasingly worried about the US economy, which appears to be nudging slowly towards recession following the subprime mortgage meltdown. Some investors are pinning their hopes on an imminent cut in interest rates by the Federal Reserve, although this could turn out to be a case of too little, too late. The FTSE 100 fell 57.1 to 6134.10.

Smiths Group climbed 6p to 981p after Morgan Stanley raised its rating from underweight to equal weight and increased its target 1000p to 1100p. It reckons the consensus growth forecast for some of the company's businesses are too low.

The broker expects the market to pay a premium for Smiths' exposure to secular growth markets. Itundertook extensive analysis of the group's core customers and competitors, and concluded that management's growth outlook and consensus expectations for Smiths Detection and John Crane are far too low.

As the market recognises Smiths' end-markets are surging, Morgan Stanley said it expects the shares to migrate to a P/E of 17 times 2008 earnings, which it sees as a healthy yet deserved premium to its peers and the market.

Keep an eye on Charlemagne Capital, 1½p better at 61½p, where non executive director James Mellon has bought an extra 1.36m shares at 60p. That lifts his total holding in the investment specialist to 55.05m. or 19.05% of the company.

Spread bets bookie IG Group stood out with a rise of 15¾p to 352¾p. Goldman Sachs has its target from 403p to 460p following Friday's first-quarter trading update. It points out the company benefited materially from the recent volatility in financial markets.

Aim-listed Probability has signed a three-year agreement with Rank Group, up 2¾p at 170p, to supply a range of mobile gambling games. It expects the revenue sharing deal to generate significant revenue for the company.

Probability, ahead 3p at 56½p, will supply Rank with a range of mobile gambling games, including roulette and blackjack, branded under the Blue Square name.

Pentagon Protection, unmoved on 0.8p, has raised £120,000 by way of a placing of 15m new shares, at a price of 0.008p each, to Singaporebased speciality security company K&C Corp. This amounts to 4.6% of Pentagon's enlarged share capital.

TAKING STOCK: Market news at a glance

BANKING & FINANCE
Subprime's a dirty word, notes Dresdner Kleinwort, but that shouldn't tarnish doorstep lender Provident Financial, which reports six month results tomorrow. The broker says Provident has defensive qualities, and it expects to review its forecasts after tomorrow's announcement. Its present target of 1080p is 200p above the current price.

BUILDING & PROPERTY
Housebuilder Redrow is unlikely to set pulses racing with its annual results tomorrow. With profits predicted to be marginally down at £120.1m and margins under pressure at around 17.3%, the best it can hope for is to restore confidence on sales rates, particularly on its starter-houses business Debut.

CONSUMER
Lactalis, the maker of President butter and cheese, is thought to be considering a bid for Unilever's herby soft cheese Boursin, which was put up for sale last week. Other bidders for the French cheese include food companies Dairy Crest, Campina and Bongrain. Boursin employs 150 people outside Paris.

ENGINEERING
Costain's first-half results should please investors on Thursday with the civil engineering division thought to be performing extremely well. Even if the buildings and oil & gas businesses remain loss making and a concern, the highways and utilities-based work in the civil division accounts for 80% of the forward order book and all the profits.

HEALTH
Eli Lilly has won an apology and $100,000 (£49,264) from a doctor who admitted illegally passing the company's documents about the side effects of an antipsychotic drug to an Alskan lawyer who passed them on to a reporter at the New York Times. The leak was selective and gave an incomplete view of matters, said Lilly.

INDUSTRIALS
Thursday sees portable-generators provider Aggreko unveil six-month figures, with UBS predicting turnover of £305m. pre-tax profits of £53.4m and a 'strong outlook'. The view on business in the US is likely to be cautious, but UBS expects there to be pressure to up forecasts following the announcement.

LEISURE
Upgrades should be on the menu after half-year results from The Restaurant Group on Wednesday. Like-for-like sales are thought to be up by at least 5%, helped by wet weather and blockbuster film releases, which favoured outlets such as Garfunkel's and Frankie & Benny's. The smoking ban should also encourage more family eating-out.

MEDIA
Analysts at Lehman Brothers point out that advertising giants WPP and France's Publicis are trading close to their lowest valuations of the last five years at 14 times 12-month forward earnings. They say now could be a good time to buy, given the forecasts are solid and they sees 'scope for a 15-20% rebound into Q1 next year'.

NATURAL RESOURCES
Tullow Oil should be worth stocking up on ahead of it joining the FTSE 100 in the quarterly reshuffle. The decision will take place on Wednesday after the markets close and, with Tullow currently the 73rd-largest company, its place looks virtually assured, says Brewin Dolphin. The most likely losers are Drax and Segro.

RETAIL
The fashion ranges at French Connection have notably improved and this should be reflected in tomorrow's first-half profit announcement. Broker Panmure Gordon expects it to break even compared with last year's loss of £3.5m. However, it is expecting recent sales to have been poor in line with the rest of the industry.

SUPPORT SERVICES
Industrial distribution group Premier Farnell, which delivers electronic maintenance and repair units, reports half-year results tomorrow with investors anxious to hear how it intends to grow the business, given sell-offs and bolt-ons of additional business have been ruled out. Margins and core growth rates will be a focus.

TECHNOLOGY
Financial software group Coda's interim results should please on Thursday. Panmure Gordon says that while licence sales may appear soft, the outlook is more positive with new sales coming in for all its products, including the newly launched Neon. However, 4.7m shares due for sale in October mean the share price will remain 'soggy'.

TELECOMS
It's time to sell BSkyB, says Dresdner Kleinwort, which is increasingly certain that Sky faces the threat of regulatory intervention in just over two years' time. It sees wholesale supply obligation or a split between content ownership and retail distribution as possible outcomes which would significantly cut Sky's returns.

TRANSPORT
Mercedes-Benz owner Daimler-Chrysler is setting up a €50m (£34m) plant in India's western city of Pune. The 100-acre plant will be able to produce 5000 cars a year, against the 4000 produced at a nearby rented plant. Demand for luxury cars is expected to rise significantly in the country as people get wealthier.

UTILITIES
UBS has the hots for Severn Trent, its favourite UK water company. It thinks it rates an 18% premium to its potential take-out value, and says now could be a good time to buy. It adds that the high level of interest for RBS's Southern Water auction reflects demand from infrastructure funds and should act as a catalyst for the sector.