BG surprise powers FTSE to a record

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BG led British blue-chips after it posted a 96 per cent increase in fourth quarter profit thanks to rising gas prices and improved production. The firm posted a fourth-quarter profit of £463 million, better than the £457 million the City expected.

Other key positives included a rebased dividend, with higher and more durable cash flows allowing BG to raise its payout by 57 per cent to 6p per share. That return comes on top of a £1 billion share buyback announced late last year.

The group also lifted its 2006 production goal and introduced bullish targets for the period out to 2012, suggesting 6 per cent volume growth per annum -- albeit at the cost of increased capital expenditure. Morgan Stanley, one of BG’s house brokers, said it had only forecast 3 per cent growth and would therefore be revising forecasts.

The US broker told clients: “The strategic targets provide visibility and reassurance that fast growth in volumes and earnings is sustainable, because this is long lived gas, not oil. The rebased, higher cash returns to investors are also a sign of confidence in longevity and sustainability.”

BG shares were lifted 57.5p to 675p, a jump of more than 9 per cent.

Cazenove lifted its share target to 700p, calling BG “the integrated sector’s last jewel.” The company “must be regarded as a potential take-out target in M&A prone equity markets and located as it is in an industry where the natural predators are increasingly over-capitalised and resource hungry,” it said.

Other natural resources companies rallied as metals prices rebounded from a bad day yesterday, which had been triggered by margin calls on gold futures. Copper and precious metals all recovered to all within touching distance of multi-year highs.

Anglo American rose 73p to 20.85ahead of results tomorrow from De Beers, its 45 per cent-owned diamond unit. BHP Billiton rose 29.5p to £10.06 and Antofagasta added 59p to £20.72.

Track today’s market movert by industry sector here.

Elsewhere among the risers, Imperial Tobacco firmed 56p to £17.51 on talk that its long-rumoured £7.5 billion move for Spanish peer Altadis may arrive soon. Altadis responded by saying it was not in any negotiations with Imps.

Still, the talk of M&A in the sector boosted Silk Cut maker Gallaher, ahead 28p to 907p, with Japan Tobacco said to be watching developments from the sidelines.

”Japan Tobacco could eye expansion into Europe as the company currently is facing a stagnating Japanese market and is actively looking at opportunities to expand,” HVB corporate credit research team said in a recent note. “Also a combination of Altadis and either Gallaher and/or Imperial Tobacco seems possible due to the good geographical fit.”

Track Imperial Tobacco shares here.

There was also -- inevitably -- bid speculation on Lloyds TSB. Shares of the lender were up 16p to 549p on talk that Wells Fargo may be running the numbers on an approach. Yesterday, ABN Amro was suggested as a possible predator, while Spain’s BBVA was mentioned last week after it lost out on Italy’s BNL.

BNP Paribas analysts argued that the speculation was “more likely to be effects rather than causes of the share price rise.” Nevertheless, they were upbeat on the bank’s annual results, due February 24, predicting a net profit £3.49 billion. That is around £100 above the market consensus.

“We do not believe that Lloyds TSB is a particularly good substitute for BNL in BBVA’s strategic planning (quite apart from anything else, it is four times the size of BNL),” the French broker told clients as it repeated “hold” advice.

A fresher (though nonsensical) story was that Citigroup may be considering buying Royal Bank of Scotland, up 42p to £17.88. Neither lender would comment on the tale, which would involve a price tag of more than $100 billion. Barclays (firmer by 16.5p to 637.5p) would probably be a more manageable target.

For detailed information on Lloyds, click here.

The approach on London airports operator BAA given increased credence, sending shares higher by 27p to 779.5p. Ferrovial, Spain’s No 2 builder, said yesterday it was considering bidding for BAA, most likely as part of a consortium.

The biggest sticking point for a leveraged buyout is that it would cost upwards of £9 billion, which would destroy BAA’s credit rating and stunt the group’s ability to borrow. That would be a problem because the the group needs to borrow to expand; Heathrow Terminal 5 alone will cost £1.5 billion this year. One solution would be for a deal using non-recourse debt, for which the borrower itself is not liable.

Merrill Lynch moved its target price on BAA up to 850p in reaction to yesterday’s news, using the assumption that the company could be bought via 80 per cent debt and 20 per cent cash.

The Wall Street bank had doubts about the chances of a deal coming though, given uncertainty about covenants on BAA’s existing debt, the regulatory review and the investment programme. However, it argued that Ferrovial’s interest “highlights the potential for a more aggressive capital structure at BAA, which the company itself could exploit.”

For detailed information on BAA, click here.

Rolls-Royce underperformed the strong market trend, down 12p to 431.5p after in-line annual results came with a smaller-than-predicted dividend.

The world’s No 2 aircraft engine maker posted a profit before tax of £676 million at an underlying level, matching analysts’ forecasts, although the 8.72p shareholder payout disappointed.

There was also some weakness below the line, with an unexplained weakness in the defence unit masked by a surprisingly high profit margin in civil aerospace. Rolls’ presented a typically muted outlook, saying noting more specific than that 2006 profits would increase and cash flow would be postive.

Read Rolls’ statement here.

ICI tumbled 14.75p to 339.25p after its annual results revealed a pension deficit of £1.5 billion, much more than the City had expected, because of its adoption of lower discount rates and longer mortality assumptions. To try and close the gap, the chemicals maker will make top-up payments to £122 million for the next four years.

Track ICI shares here.

Tesco was another faller, down 6.5p to 320.5p on news of its surprise entry to break the US grocery market. Britain’s biggest supermarket had had dismissed any suggestion of a plan to go west, even though it was known to be flying executives across the Atlantic for more than a year to look at existing chains such as Albertsons.

The group will start building convenience stores on the US west coast beginning in 2007, modeled on its Express format. It plans to spend £250 million a year (equivalent to about 6p a share) and aims to be profitable in the second year of operations.

“In the long term this move could generate significant growth for Tesco, but in the short term this will likely be overshadowed by the potential pitfalls,” Citigroup told clients. “The US is seen as a very difficult market, primarily due to the enormous success of Wal-Mart. Tesco has competed very successfully against Wal-Mart in the UK, but this was from an initial position of strength. In the US Tesco will be starting from scratch.”

Tesco sharehlders may be forgiven for tiring of jam tomorrow, argued Philip Dorgan, Panmure Gordon’s retail analyst.

“Tesco sees itself as a growth company,” he wrote. “Free cash flow generation is always two years away, but never quite achieved, because it always finds something to spend its money on. This move in itself does not prevent it from paying higher dividends ... but underlines the fact that Tesco would rather invest its money than return it to shareholders.”

However, brokers including Citigroup and Panmure saw the US move as lowering the risk that Tesco would gamble on a major acquisition. The grocer had lately been rumoured to be interested in partnering private equity fund KKR for a bid on Dutch-American chain Ahold, a suggestion that now seems implausible.

For more on Tesco, click here.

Group 4 Securicorwas among the strongest mid-cap features after Securitas, its closest peer, posted fourth-quarter results that were well ahead of expectations and revealed plans to break itself into four separate companies. That will leave Group 4 as the largest security company in the world by market value.

Securitas’s forecast-beating results were mostly via its its US guarding business, which took a temporary lift from the hurricane season. However, trading was positive in ten of its 13 operating regions -- suggesting Group 4 will report something similar at its results due in mid-March.

There was also hope that Group 4 will follow its rival and consider splitting up to release value. Like Securitas, the Anglo-Danish company has four operating units: Security Services, Security Systems, Cash Services and Justice Services (ie. prisons).

“Even if G4S were not to pursue this route, we think it very likely that private equity groups will,” Enskilda analysts wrote. They have a breakup value of 239p on the shares, which took on 6.75p to 177p today.

For detailed information on Group 4, click here.

A short squeeze pushed Sanctuary onto the small-cap leaderbaord, higher by 0.25p to 1.65p. That came after the London Stock Exchange yesterday sent round a memo reminding its members of their settlement obligations ahead of the record company’s rescue refinancing. About 17 per cent of Sanctuary stock is reckoned to be out on loan.

Expectations of something similar happening to MFI pushed its shares up 2.25p to 68.75p. The furniture retailer’s management has been rumoured to be visiting institutions to gauge interest for a share issue at about 50p apiece to pay for a rebuild of its UK retail side. MFI is thought to be the British market’s most-shorted stock, with more than a quarter of its equity lent out.

Track Sanctuary shares here.

Woolworths closed flat at 35.75p even after Baugur confirmed recent recent rumours that it had taken a 6 per cent in the Pick & Mix retailer. The Icelandic group is said to have raised the cash by reducing its none-too-clever investment in French Connection, which was taken last Autumn at 285p each. (FC rallied 4.5p to 254.5p today as that overhang was mopped up.)

So was Baugur getting in position for a takeover? Or was it making another expensive mistake? Nick Bubb, retail analyst at Evolution, reckoned the latter:

“No doubt Baugur have done their homework on this, but we don’t think the (sum of the parts) is much more than 30p and that the Baugur stake news is a very good selling opportunity,” he said.

Among the many bear points highlighted in Mr Bubb’s note were: Woolworths’ large pension deficit; its lack of freehold property; its seasonal overdraft created by a reliance on Christmas sales; and its capital expenditure programme “that barely exceeds the depreciation charge”. He also noted that the group’s profit came almost entirely from its wholesale unit -- dependent on one Tesco contract that may not be renewed -- and its BBC video publishing joint venture, which is dependent on the faddish popularity of Little Britain).

“The 800 stores in the Main Chain gives it £1.75 billion of sales but, as supermarkets chip away at the core business, the low sales densities and high operating costs mean that it effectively makes no money,” he wrote.

For more on Baugur’s interest in Woolies, click here.

On broker watch:

JPMorgan cut BHP Billiton and Rio Tinto to “underweight” from “neutral”.

Merrill Lynch raised Great Portland Estates to “buy” from “neutral”.

Altium moved to “hold” from “add” on BetonSports.

And Citigroup raised Ryanair to “buy” from “hold”.

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