Management meeting boosts L&G

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Legal & General gained 2.25p to 136.5p after yesterday hosting a teach-in for analysts about its protection and annuities markets. These account for about four-fifths of new business and a quarter of group profit. But profit margins at about three times the industry average have sparked investor concern that management is being too aggressive on assumptions such as mortality, and that profitability could decline sharply as new competition enters the market.

Management were partially successful. Many attendees believed the message that L&G’s market leading position will provide both a defence against new competitors and a springboard to growth. Some analysts, notably the Citigroup team, left unconvinced that L&G’s margin lead was not based on unrealistic assumptions. But shareholders seemed more interested in a reminder about L&G’s next meeting, on capital and cash flows, due for November 15.

The current capital required to back L&G’s protection business is significantly below current statutory requirements. The Financial Services Authority is investigating this at the moment, leaving the potential for balance sheet restructuring and more generous returns to shareholders, they said.

AWG led the water utilities after admitting it has received a preliminary bid approach from a party it did not name. Shares in the firm, which runs Anglian Water, were ahead £1.50 at £15.12

Market sources believe the bid approach has come from a consortium of financial investors; there were rumours in the market yesterday that AWG could be taken out by an infrastructure fund at a price of £16 a share.

According to Goldman Sachs, a £16 valuation on AWG shares would imply upside in the other water companies of between 6 per cent and 14 per cent. However, the Wall Street broker questioned whether such an offer would emerge.

“Such a bid for AWG would appear expensive and overly optimistic of the next price review,” said Goldman, referring to Ofgem’s impending review of electricity transmission rates of return. “For AWG in particular, its already highly geared nature also indicates less opportunity for financial engineering.”

AWG stood at a 21 per cent premium to its March 2006 regulated asset value (RAV) as of last night, according to Goldman’s analysis. At £16 a share that would rise to 29 per cent -- beyond the range of previous sector takeovers, which have happened between 10 per cent and 28 per cent over the past two years.

The news boosted AWG’s blue chip peers. Kelda was ahead 25p to 836.5p and Severn Trent rose 29p to £13.48. United Utilities gained 10p to 696p. But Goldman kept a “neutral” rating on the water utilities in response to today’s sector-wide gains.

“Even if further bid activity does occur, there seems now only limited upside on this basis and fundamental downside with a view to lower returns post 2010. We continue to see little value in the UK water shares and would use this opportunity to take profits,” it told clients.

Track today’s trading by industry sector here.

There was also bid news for Countrywide, with a 3i-backed management team confirming they are considering taking the estate agent private. Shares jumped 45p to 506p.

3i Investments said the Countrywide board members it was working with included Harry Hill, managing director. “There can be no certainty that any offer will be forthcoming,” it said.

And John Laing rose 55.5p to 331p after the engineer and railway operator said it had received a non-binding offer. The group, most of whose recent problems came from a railway tunnel collapse at the site of a new Tesco at Gerrard’s Cross, was in short lived bid talks this time last year. Then as now, dealers reckon it has attracted a private equity bidder.

Back among the blue chips, Kingfisher was ahead 5.5p to 245.25p after its second-quarter results showed a better-than-feared performance at B&Q.

While earnings at the DIY chain dropped 43 per cent, only 11 per cent of that came in the latter two months -- partly thanks to weaker comparatives, but also aided by a more stable market, improvements in the store and on pricing. Tests of a new Warehouse format also appear to have worked, supporting hopes that management can inject life into the UK business.

Read more on Kingfisher’s results here.

BG Group climbed 12.5p to 658p thanks to a tip from Morgan Stanley, which raised its rating to “overweight” from “equal weight” on an 800p target price.

“We believe BG has a more robust base business than its peers, providing it with a stable platform from which it can continue to offer growth rates well above the sector average,” it said of the gas company. “It offers the highest rate of non-upstream growth in the sector, in our view, through the rapid expansion of the (liquefied natural gas) business supplemented by the transmission and distribution business.”

Morgan Stanley’s team forecasts BG to grow production by over 7 per cent per annum out to 2010, with potential for 10 per cent. That growth makes it something other than a conventional integrated oils company, and deserves a greater premium to the sector, it said.

BG shares were also helped by reports that Gujarat State Petroleum will invite final bids to buy a 30 per cent stake in a gas field off India’s east coast. BG would be seen as the front runner for the stake, ahead of BP, Eni and Chevron.

Kazakhmys paced gains among the mining stocks ahead of its first half results due September 19, up 25p to 245.25p. Underlying profit at the Kazakhstan-based is expected to have doubled thanks to strong copper prices, although cost inflation may temper the effect.

That came as metals prices inched higher in quiet trade on the London Metals Exchange, with copper rallying off yesterday’s three week low as workers at a Canadian copper mine voted on whether to strike over a pay deal. Xstrata was ahead 11p to £22.32, BHP Billiton gained 2p to 931p and Antofagasta added 5p to 454.75p.

For more news on natural resources stocks, click here.

PartyGaming led the FTSE 100 risers, up 4.5p to 110.25p, on news that SportingBet’s chairman Peter Dicks has resigned after being charged with illegal internet gambling in the States. SportingBet rallied 25p to 178p.

On the loserboard, GUS faded 26.5p to 970.5p after confirming its plan to demerge the credit checking agency Experian from its retail unit, with the latter’s name changed from Argos Retail Group to Home Retail Group.

Experian will be priced at between 475p and 610p a share, which will value the firm at £5.5 billion including an £800 million equity raising. Analysts said this range may be seen as a bit disappointing.

GUS’s accompanying trading statement was pretty much in line with what the City expected, and management was predictably cautious on the outlook.

Argos’s sales growth has slowed after a strong first quarter boosted by World Cup TV sales, to 2 and 3 per cent on a same store basis. Homebase sales were flat in the second quarter, an improvement from the first, as “showroom” -- kitchens and bathrooms -- compensated for weak DIY.

GlaxoSmithKline lost 23p to £14.64 after a new diabetes drug from rival Novartis was shown to cut blood sugar levels as much as Glaxo’s Avandia but without some side effects. Tomorrow, Glaxo is due to release data on the DREAM study, a major six-year trial of Avandia’s effectiveness in preventing type 2 diabetes.

Premier Foods sank 14.25p to 264.75p after it pulled out of talks to buy the UK and Ireland units of United Biscuits, maker of Jaffa Cakes and McVitie’s Digestives. Its withdrawal means Blackstone, the US buyout firm, looks set to take United for about £1.7 billion.

According to reports, Premier’s deal floundered after private equity firm Lion Capital withdrew from the talks, leaving a £250 million funding gap. Lion had discussed buying United’s KP Snacks arm, with NPM Capital acquiring the continental European operations and Premier taking the biscuits.

On broker watch:

Goldman Sachs raised Unilever to “neutral” from “sell”.

HSBC restarted Computacenter with a “neutral” rating.

Morgan Stanley cut Bunzl to “equal weight” from “overweight”.

Altium downgraded Xaar to “sell” from “hold” and cut both Wolfson Microelectronics and Whitehead Mann.

to “hold”, from “add” and “buy” respectively.

Citigroup raised Emap to “hold” from “sell”.

And Bridgewell cut Pipex to “underweight” from “neutral”.