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Markets wary as credit crisis affects housebuilders

This article is more than 16 years old

Housebuilders were in focus today after analyst comment and a trading statement from Bovis Homes.

Strangely, while most of the sector fell back, Bovis moved 7p higher to 650p despite warning that 2007 profits would be lower than expected.

Panmure Gordon said: "In terms of share prices, we expect to see a negative reaction across the sector. Bovis tends to be very honest about market conditions and certainly in the 2004 slowdown the company was the first to warn. However, it is still disappointing to get another downgrade this early in the down cycle. Nevertheless, reading across, Bovis cannot be the only housebuilder to be feeling the pain and, therefore, we expect more statements like this to follow over the next few months."

Traders said the Bovis move was prompted by hopes of a takeover.

Meanwhile, Panmure was right about the price reaction in the rest of the sector. Barratt Developments lost 9.5p to 594.5p as Credit Suisse cut its price target from 950p to 780p. Persimmon - where Credit Suisse reduced its forecast from £14 to £12 - lost 16.5p to 960p and Taylor Wimpey was 4.75p lower at 227.25p, compared to the bank's 300p target, down from 480p.

Credit Suisse said there was longer-term value in the housebuilders but it remained cautious for the moment.

"We believe the sector will remain under pressure from further earnings downgrades (real or perceived), downbeat corporate comment and negative investor sentiment, and thus there is no rush to buy into the sector for investors with nearer-term investment horizons."

It also expected more sector consolidation. "Given its operational and financial flexibility, we suggest that Persimmon is likely to make the first move. Given the group's strong record in previous acquisitions we suggest that such an event, valuation dependant, would be well received by the market," said Credit Suisse.

"We also highlight a noticeable pick up in both buybacks and insider buying; Persimmon has recently initiated a buyback programme, joining Taylor Wimpey's ongoing programme, whilst senior management at both Barratt and Berkeley have recently been buying stock themselves."

Overall, leading shares edged higher although volumes were quite subdued. By the close the FTSE 100 index was 13.5 points ahead at 6474.9, but the recovery was fairly fragile.

Miners recovered some ground, as workers at gold, zinc and copper operations in Peru went on strike. BHP Billition added 75p to £17.75, while Rio Tinto rose 137p to £43.34 as aluminium prices moved higher.

Ryan Kneale, market analyst at BetsForTraders, said: "Mining stocks have put in a solid performance today, as metal prices have started to increase again. We have seen copper rise for the first time in November and tin prices are at a record 18-year peak. Add to this the fact that gold is resiliently trading above $800 and mining stocks are very attractive in the near term."

Supermarket group J Sainsbury added 5p to 445p after yesterday's falls, in the wake of the failure of a 600p-a-share offer from a Qatar-backed consortium. JP Morgan raised its recommendation from underweight to neutral and its target price from 400p to 440p.

"Sainsbury's share price fell to a sensible level yesterday, in our view, when Delta Two announced that bid talks had been terminated," said JP Morgan. "Our new target price of 440p would put Sainsbury on 10x lease-adjusted earnings, about in line with where we think both Morrison and Tesco deserve to trade. We will get an operational update next week with the interim results.

"With the credit markets still in some turmoil and private equity activity much reduced, we do not expect a new offer for Sainsbury to materialise any time soon (unlike after the failure of the first Sainsbury bid this year)."

But Mitchells & Butlers - where Sainsbury shareholder Robert Tchenguiz also has a stake - fell another 13p to 618p. There were fears Tchenguiz may be a forced seller of some of his stakes, given his potential losses on his Sainsbury shareholding.

As the market was closing, Tchenguiz issued a rare public statement, saying his R20 vehicle intended to hold on to its stakes in Sainsbury and M&B and that "rumours and speculation to the contrary are unfounded. Both companies have significant value in excess of current valuations and both have a strong future". He pledged to work with the boards of both companies "to realise their potential for attractive shareholder returns".

It was a busy day for major company results, with Marks & Spencer up 21p to 653p after forecast-beating figures for the half year and the announcement of a £1bn share buyback.

But AB Foods - the sugar and Primark fashion group - fell 21.5p to 890.5p despite a 10% profit increase, on concerns that rising commodity prices would hit its profit margins.

Intercontinental Hotels lost 25p to £10.25. Third-quarter profits rose 22% but there were worries about the effect of the dollar on future earnings. Traders also said takeover hopes had faded, given the current reluctance by lenders to fund bids.

Software group Micro Focus reported a strong first half and raised its revenue guidance for the full year, helping push its shares 61.75p higher to 355.5p.

But pubs group JD Wetherspoon was 15.5p lower at 486.5p after a cautious statement, which they claimed was partly due to the smoking ban.

TV and radio group SMG added 1.5p to 30p despite it announcing a rights issue at 15p a share to raise £95.1m and help cut its £135m debt. ITV, which holds a 17% stake, edged up 0.5p to 95.8p although it is not clear whether the broadcaster will take up its rights.

Lower down the market, recruitment group Imprint added 9p to 111p as rival Hydrogen launched an all share off of around 125.6p a share. This tops an existing cash and share bid from another business in the sector, OPD. There are also various former directors including Brian Hammill and Pierce Casey waiting in the wings, with talk of them wanting to buy parts of the business or even making a full rival bid.

Mining group Bezant Resources was 6.5p better at 96p. The company has increased its investment in the Mkurumu gold project in eastern Tanzania by 23% to 46%, taking its stake to the same level as its partner AngloGold.

Finally, electronics equipment group Armour added 1p to 42p as full year pre-tax profits rose from £2m to nearly £3m before a £2.7m write off associated with the sale of its custom installation business.

Armour has a host of new products coming onstream, including an iPhone-compatible hands-free set due to go on sale on Saturday through Carphone Warehouse.

It has also been developing a boy racer product - a sound system which makes a 2CV sound like a Ferrari and is likely to be named Mutant DNA - and this should go on sale early next year. It is currently talking to its US partner about an American version of the product, which is based on technology developed and patented by Lotus.

The company is keen on acquisitions, especially making a major move in Europe or getting involved in a UK telemetry business, but nothing is likely to be imminent. It has also developed a website, endulgence.co.uk, to sell its products direct to the consumer. Two more websites, one aimed at trade buyers and the other acting as a factory outlet, are also being developed.

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