WM MORRISON emerged with the best FTSE 100 gain, on the view that the food retailer’s success in lowering prices at the newly acquired Safeway augurs well for a sales recovery in its next financial year.
After gathering data from UK grocers, UBS finds that prices have fallen across the sector by 2.5 per cent since February. However, it finds the biggest improvement has come at Safeway, where the total cost of the average basket has fallen by 8.1 per cent.
Simon Dunn, analyst, notes that Morrison has implemented two thirds of the price reductions that it considers necessary at Safeway and finds the enlarged retailer has been able to reverse previous falls in sales volumes: from a near-8 per cent decline to a 1 per cent gain. The broker predicts that further price deflation means the comparative value of cash sales are set to remain negative in the current financial year, but says Morrison’s pricing strategy should ensure a recovery in sales volumes in the next financial year.
Taken together with the effect of post-merger cost savings and its store conversion programme, UBS expects compound growth in pre-tax profits and earnings per share of 20 per cent through to 2008.
With UBS repeating its buy and 310p target, Morrison rose 7p to 237p. The FTSE 100 gained 32.5 at 4491.1.
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Despite the distractions of Royal Ascot, speculative activity remained to the fore. Marks & Spencer touched 370½p, but closed 6½p better at 363½p, amid talk that Philip Green would table an all-cash offer of 385p to 395p today. Abbey National put on 9½p to 485¼p amid suggestions that Spain’s Banco Santander — whose informal approach to the mortgage bank was rebuffed in March — is set to return with a higher offer.
Further institutional buying following its continued round of investor presentations saw BT Group gain 5½p to 194p, a nine-month high. Dealers said Ian Livingston, finance director, had come across well in the meetings that have followed the telecom carrier’s May 20 prelims. However, much of the turnover in shares yesterday — which reached 380 million — was pinned on derivatives-related activity.
Dixons added 1½p to 156p on hopes that the electricals retailer will detail its plans for its £525 million cash pile at next Wednesday’s full-year results. JP Morgan points out that a £200 million share buyback would enhance earnings per share by 5 per cent and is likely to be taken well by investors. It also says a failure to return cash, or a major acquisition, could be taken negatively.
Smith & Nephew firmed 4p to 584p as Sir Chris O’Donnell, chief executive, declared the purchase of 13,057 shares at 583.32p under the company’s co-investment plan, through which he will receive a matching award of shares at nil cost in three years if performance conditions are met.