BAA shares rose almost 4 per cent after a bullish note from a broker that downplayed the regulatory risk to the owner of Heathrow and Stansted.
Tim Marshall, analyst at UBS, the stockbroker, said that the investment community was “too scared” in its outlook for BAA, which will be dependent on a regulatory review in 2008.
In addition, Mr Marshall has upgraded his valuation of BAA’s non-regulated businesses, such as the international airports and non-regulated airports in the UK, by £600 million, prompting him to raise his price target for BAA from 650p to 700p.
Mr Marshall argued that the wider market was discounting BAA’s value too heavily in fear of the 2008 review, which will effectively dictate what the airports owner can charge for its facilities for five years from 2009 onwards. BAA is regulated on what he calls a single-till basis, which means that revenues from both aviation and retail activities are measured against the company’s regulated asset base (RAB). BAA’s allowed return on RAB is 7.75 per cent, and Mr Marshall says that market fears that returns will drop as low as 4.75 per cent after the 2008 review are wrong. His bullish note, culminating in an upgraded recommendation from “neutral” to “buy”, propelled BAA’s shares 23½p to 622p.
BAA’s strong performance helped to drive the FTSE 100 index 18.7 points higher to 5,109.1.
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ITV, up 6½p to 122½p, was the best-performing index member as investors applauded Ofcom’s decision to reduce broadcasters’ fees by a bigger than expected amount.
Renewed takeover speculation fuelled Britain’s telecoms sector, with Cable & Wireless up 5½p to 148½p on rumours that France Télécom was considering a move. The rumour is not new but proved sufficient to boost O2 by 3¼p to 132¼p, while the positive sentiment rubbed off on Vodafone Group, up 2½p to 137p, and BT Group, 4¼p ahead at 228¼p.
BAE Systems firmed 4½p to 282½p on news that it had been awarded a £60 million UK Ministry of Defence contract to provide logistics support for the army’s AS90 artillery guns.
This week’s slight dip in the oil price led to profit-taking among some of the index’s biggest shares, BP and Shell Transport and Trading. BP fell 8p to 587p; Shell lost 6½p to 538½p. Most analysts believe that Shell is set for a rerating now that shareholders have approved a simplification of the Anglo-Dutch company’s dual-listed structure. The resultant single-entity parent company, Royal Dutch Shell, will have a substantially heavier
FTSE 100 index weighting, leaving tracker funds to scramble for shares to meet their requirements.