Market report: Wednesday close

By Mickey Clark for MailOnline
Updated: 12:19 EDT, 13 February 2008

The subprime lending crisis in the US continues to take a heavy toll of profits at HSBC, according to UBS, which has raised its rating on the shares from neutral to buy because they look cheap but has trimmed its target from 890p to 840p.

Evening Standard stock market correspondent Mickey Clark

The broker has cut its forecasts for the bank's US subprime operation Household once more because of higher credit-card and car-loan delinquencies and the front-loading of mortgage losses. It now sees Household making a $4.7bn (£2.4bn) loss this year and cumulative losses of $8.6bn from the fourth quarter of 2007 to full-year 2009.

Household will probably require another $8bn in capital from HSBC, 1p dearer at 746p, but the broker believes cyclical profitability at the business is $1.8bn after tax.

There has been a marked deterioration in credit-card and carloan defaults at Household, and this has coincided with the frontloading of mortgage losses which is driven by information available that will allow HSBC to raise early impairments.

On a rating of nine times earnings, after-tax profit less the required capital injections suggests a fair value for Household of $8bn-44bn higher than the current market valuation of the business, says UBS.

It expects a reassessment when the rate of US housing deterioration slows, possibly as soon as the second half of 2008. The yield stands at 6.4%, so the only reason not to own the shares is the long wait before Household hits rock bottom.

Alliance & Leicester was 42p lower at 559p on the back of disappointing numbers from Bradford & Bingley, down 56¼p at 187p. Bear Stearns warns that B&B faces a bleak future with rising impairments and slowing revenue growth. The broker has repeated its underperform rating.

Shares generally came off the boil after being squeezed sharply higher yesterday. Dealers say the low turnover this week indicate that buyers have backed off for the time being, leaving prices to find their own support levels. The FTSE 100 index, up more than 200 points yesterday, fell 29.87 points to 5,880.1 today.

Reckitt Benckiser rallied from the opening fall that greeted full year results, adding 68p at 2723p. Rio Tinto dropped 23p to 5500p after again rejecting the all-share bid terms from BHP Billiton, down 13p at 1542p.

InterContinental Hotels firmed 18½p to 769½p ahead of results next week. Deutsche Bank has slashed its target price from 1075p to 775p, faced by a tougher outlook and downgraded profit forecasts. It reckons the company will miss its owned-asset return targets.

Car trader Pendragon eased 1¾p to 34½p ahead of results next week. The shares have slumped from a peak of 125¼p last year, hampered by several profit warnings. Sales of new cars fell 5.3% last month, and the outlook remains bleak. Brewin Dolphin says sell Pendragon with margins coming under continued pressure. The speculators say keep an eye on the property portfolio, which may be enough to attract a bidder.

Gulfsands Petroleum, up 1p at 165¼p, has started drilling at its Khurbet East Field following approval by the Syrian Government. The explorer has also confirmed that a 100 square kilometre area of Block 26 has been converted to the development area Khurbet East.

It expects the 3D seismic survey south of Khurbet East to yield high-quality exploration drilling prospects, and one or more of these to be drill-ready this year.

TOMORROW'S AGENDA

• Drinks giant Diageo delivers first-half results. Analysts are forecasting that the figures will be strong. However, there is speculation that the Guinness and Smirnoff owner may struggle to maintain its profits growth later in the year as cash-strapped consumers curb spending in the key US market.

Nevertheless, rocketing demand for high-end spirits should prevent Diageo from being hit too hard by an American recession. Investors will also be keen to learn about plans for Dutch premium vodka label Ketel One, in which Diageo bought a 50% stake last week after pulling out of the auction for Swedish state-owned brand Absolut.

• Thomas Cook, Europe's second-biggest tour operator, updates the City on trading. Chief executive Manny Fontenla-Novoa is expected to be upbeat after reporting in January that summer bookings were strong and that big snowfalls had sparked a surge in demand for skiing holidays. The group, which merged with MyTravel last year, suggested that travel companies will prove almost immune to the economic downturn, with consumers unwilling to sacrifice their week in the sun.

• West End-focused property firm Shaftesbury issues a trading statement. Like its rivals, the owner of large parts of Chinatown and Carnaby Street has seen its shares plunge in the last year, but analysts believe its portfolio of prime properties make it more resilient than competitors. Shaftesbury hit the headlines at the weekend on reports that sportswear tycoon Mike Ashley and property investor Paul Kemsley had amassed a stake in the company.