Next rumours help FTSE bounce

This weekend’s St Leger horse race meeting in York is the traditional inducement for UK investors to come back the stock market after the summer break, and their return usually makes some waves. Geoff Robson-Scott, Deutsche Bank’s chief technical analyst, has been warning of late that markets could be in “a lot of trouble” between now and the turn of the month, based on both historic volatility and longer term bearish trends.

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On the FTSE leaderboard, GUS climbed 25p to 973p after strong results from Equifax, a US peer of its Experian credit checking agency. Equifax said its 2006 earnings would exceed $2 a share, compared with previous guidance of between $1.90 and $1.99.

There was also a Friday rumour doing the rounds, with dealers claiming that at least one private equity firm is looking into making a bid for GUS’s retail arm after its demerger from the group next month. GUS admitted in June it has received expressions of interest for both the retail side, which includes Argos and Homebase stores, and Experian, but decided to continue with the split.

The hot money also flocked towards Next on a similar story, with shares in clothes retailer adding 63p to £17.29 on whispers it could be a target for a private equity buyer.

Nobody could put a name to the predator, and the story lacked anything in the way of other supporting detail. Some sceptical traders worried that the gossip could have been conjured up by a stale bull, who wanted to close a risky position ahead of Next’s interim results next Wednesday.

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B&Q owner Kingfisher, which is usually lifted by the merest whiff of takeover action in the retail sector, ended flat at 237p after US peer Home Depot extinguished one of the City’s longest running bid stories.

Bob Nardelli, Home Depot’s chief executive, ruled out expansion into Europe because of the fragmented nature of the marketplace, as well as restrictive planning regulations and sluggish economic growth.

“Europe is off the agenda. The answer on Kingfisher is no,” he said in an interview with the Financial Times. “It is not a reflection on Kingfisher because it is a good company .. but our focus right now is China and we still have lots of opportunities in North and Central America.”

Kingfisher trades at a premium to its sector, partly based on recovery hopes after a couple of bad years, but also on expectations it will be bought. While Home Depot seems to be out of the frame, the bulls held on to hopes that US rival Lowe’s or private equity could yet emerge as predators.

Currency dealer Icap trailed Next on the FTSE 100 score board, up 16p to 466p. There were solid figures from rival GFI Group yesterday, which boosted hopes that Icap will raise guidance at its interim results at the end of the month. Icap’s EBS currency matching system may also have benefited from increased business after Reuters rival matcher fell over for three hours last night.

Sage Group added 5.5p to 242.5p after the accountancy software maker’s finance director, Paul Harrison, gave an upbeat speech at an IT conference in London this morning. Sage is due to give a trading update in the middle of next month, so there was no explicit earnings guidance, but the general message on trading, acquisitions and competition proved reassuring.

On Microsoft, which has been reporting some success lately in Sage’s key markets, Mr Harrison said the gains were likely from its existing customer base and his company had not lost market share. He also talked up the opportunity for Sage to cross-sell to its 5 million customers, and to move them on to more expensive products.

Deutsche Bank, which hosted the conference at one of its City offices, repeated “buy” advice on Sage and said remained was comfortable with year-end estimates.

Prudential took 5.5p at 583p after Merrill Lynch raised its rating to “buy” from “neutral” on a 680p fair value.

The Wall Street broker told clients that Pru shares had performed relatively poorly over the past three months, and is the third-cheapest stock in the European insurance sector. The current valuation ignores outlooks a positive outlook over the next two years, it said.

That follows Prudential being sold back after its first-half results highlighted concerns it is too reliant on bulk annuities sales, which are higher risk, tie up substantial capital and could become less profitable because of new competition. There have also been questions asked over its cost base both at the insurance business and at the Egg internet bank, where losses have been sharper than expected.

But Merrill argued that Pru has the systems in place to grow its UK annuity business at attractive margins, despite rising competition, and a poorer performance of the non-annuity side is already in the price. Likewise Egg, where Merrill reckons Pru overpaid, but only to the cost of 5p from its share valuation. Moreover, capital ratios are adequate and cash flow will be a positive factor by 2008, it said.

“All in all, we feel that the valuation arguments are attractive,” Merrill told clients. Prudential is a company that regularly falls in and out of favour. Given the fall after the first-half results, we believe that this is an opportune time to build up holdings.”

Mining stocks did most to drag the FTSE off its best levels, reacting to nothing more than a reverse among the metals market, which was triggered by a small recovery in the dollar. Gold, silver and copper were all volatile as speculators banked a week of gains and the greenback-denominated contracts became more expensive for users of other currencies.

Antofagasta was down 9.75p to 461p and Vedanta Resources lost 41p to £13.21. Anglo American, slid 16p to £22.27 even after UBS analysts wheeled out the old break-up theory.

“The remaining core divisions post the potential unbundling of AngloGold and Mondi [Anglo’s paper packaging division] could be split up quite easily between Xstrata, Vale do Doce and Rio” Tinto, it told clients.

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Elsewhere among the losers, AstraZeneca slid 45p to £33.00 after Citigroup cut its rating to “hold” from “buy” on valuation grounds, saying the two-month rally in the shares had left risk and reward evenly balanced.

AGA Foodservice -- maker of the eponymous cooker as well as industrial kitchen equipment favoured by French bakers -- was on offer after its US consumer division disappointed in an otherwise in-line set of interim results. Shares eased 5.75p to 366.25p.

Aga’s profit before tax rose to £20 million, up from £18 million last year although this included a £1.5 million property gain and a similar amount of restructuring costs. Turnover rose 21 per cent to £273 million, with sales up 8.1 per cent excluding acquisitions.

House builder Bovis Homes gained 21.5p to 861.5p ahead of first half profits due Monday, which are expected to show profit up 18 per cent in the first half thanks to higher volumes and selling prices. Bovis has already said in a trading statement that it sold 1262 houses in the period at an average of £188,700, so investors will be more interested in recent trading.

GCap, Britain’s largest commercial radio group, dropped 8.5p to 200.75p. Merrill Lynch said that a deterioration in in trading could put stress on the broadcaster’s banking agreements, forcing a dividend cut.

That follows second-quarter audience figures from RAJAR last month that showed listeners deserting GCap’s key stations; Capital Radio’s share was down to 5 per cent from 5.5 per cent and listening hours dropped 24 per cent year-on-year. That has a knock-on effect to advertising, with Merrill expecting GCap to say it has substantially underperformed the market when it provides a trading update on September 28.

GCap had net debt of £76 million at March 2006, forecast to rise to about £84 million by March 2007 because of dividend expenses. The company’s banking covenants define that net debt must be less than 3 times operating earnings, and Merrill forecasts earnings of just £25 million on the same basis next year.

“We do not believe the banks are likely to foreclose on their loan arrangements. Rather we believe the most likely outcome will be a refinancing with some additional capacity and an extension of the credit terms. However, we believe this may trigger the dividend to be clipped,” said Merrill. The broker cut its rating on GCap to “sell” from “neutral”.

Among the small caps, Sports Cafe said -- after the close, when its shares had already risen 45 per cent -- that it was sitting on an informal bid approach. The screen-reliant bar chain said the approach was “very preliminary and no indicative offer had been received”.

Austin Reed added 7.75p to 126.75p after private equity firm Dawnay Day said it had approached the suit maker’s board to offer 131p per share. It said the offer was a 24.7 per cent premium over Austin Reed’s share price over the last 12 months.

“This announcement does not amount to a firm intention to make an offer and, accordingly, there is no certainty that an offer will be made,” it said.

Dawnay Day, known for building stakes in companies with strong property asset backing, currently holds 29.88 per cent of Austin Reed shares.

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On broker watch:

Credit Suisse rated WH Smith “outperform” in new coverage, with a 395p target.

Citigroup cut Tomkins to “hold” from “buy”.

Altium cut Axon to “add” from “buy”.

Deutsche Bank raised Matalan to “buy” from “hold”, rated Hays a new “hold”, and started coverage of Michael Page on a “buy” and a 447p target.

Morgan Stanley downgraded Benfield to “equal weight” from “overweight”.

And Goldman Sachs downgraded Tomkins to “neutral” from “buy”.