Telecoms disconnect as FTSE slides

Stock benchmarks were expected to be rangebound until the United States interest rate decision, due later tonight. The Federal Reserve is expected to add another quarter point to borrowing costs and provide some indication on whether the current tightening cycle is coming to an end.

For detailed information on US markets, click here.

Back in London, Cable & Wireless sank 12.25p to 102.25p after it warned that underlying UK earnings for its year ending 2007 would be no higher than the previous year. Analysts had been expecting profit growth in excess of 50 per cent.

The warning came as C&W announced plans to split into two self-contained operational business units, UK and International. That reorganisation means Francesco Caio, its chief executive, will step down after the start of the new financial year in April.

The telecoms firm, which has a history of disappointment against market forecasts, said profit margins and restructuring costs will dent its 2007 outlook as one-off items fall out. But there were no meaningful figures included in C&W’s statement, suggesting its earnings visibility is down to zero.

The lack of detail made forecasting earnings tricky: Cazenove guessed that core UK forecasts for fiscal 2007 would have to come down 37 per cent and earnings expectations would drop 48 per cent, taking the later number back to around 4.8p per share.

C&W shares had traded higher for most of yesterday’s session after reported stakebuilding by an Icelandic investor triggered a revival of bid rumours. Even while the market was digesting today’s latest disappointment, some were speculating that a split of the company could be a first step to attracting a predator for the UK side of the business.

However, C&W management said the UK side is “a long way from a being a strong company ready for demerger”. The group’s pension deficit may also stand in the way of any breakup, dealers said.

For more on C&W, click here.

The profit warning had a modest read-through for the rest of the telecoms sector, with BT Group down 2.5p to 205.5p. According to Goldman Sachs, C&W’s problems can be seen as stock-specific not sector-wide, because they originated at its core UK corporate business rather than in the Energis acquisition.

That salve did not stop mid-cap peer Colt Telecom from dropping by 3p to 59.75p.

Colt, which is due to post 2005 results in the last week of February, is already 18 months through its strategic transformation. That process could be disrupted if price competition escalates and legacy business falls away quicker than expected.

For detailed information on Colt, click here.

A profit warning also came from filtration specialist Whatman, which blamed manufacturing problems and changes to accounting rules for 2005 profits just missing expectations.

Whatman shares slid as much as 28.25p to 286p before rallying to close down just 5.25p at 286p. Bob Thain, the company chairman, used an investor meeting today to explain that the statement looked worse than it was, and operating earnings growth remained on track and will match City forecasts.

(Mr Thain is currently being courted by rebel SkyePharma shareholders to jump ship; his bullish performance at today’s meeting was enough to convince some attendees that he will not be sending out his CV any time soon.)

Track Whatman shares here.

ARM Holdings was another second-liner to have a volatile session, with shares trading as low as 127.25p only to close down just 1p at 132.5p.

The microchip designer’s fourth-quarter profit came in on forecast and was accompanied by an in-line (albeit vague) outlook statement. But the lack of exact guidance from management provided a scare, and led some to search for weakness in the detail of the statement.

ARM, whose blueprints end up in most mobile phones, said pretax profit rose to £23.7 million from £5.3 million a year earlier, thanks in the main to last year’s acquisition of US peer Artisan. The consensus of analyst forecasts was for profit of £21 million.

The biggest disappointment was order volumes, with just 11 deals signed in the fourth quarter compared with 23 in the third. There was also some concern that PIPD, the renamed Artisan, did not show much improvement even against a disappointing third quarter.

“Overall we think Artisan remains a lingering concern and a drag to an otherwise solid set of numbers,” said analysts at JP Morgan. SocGen was more keen, arguing: “ARM is near the bottom of an inflection point in its product cycle and it will begin to show improving momentum over the course of 2006.”

At Morgan Stanley, ARM’s joint house broker, they raised a share-price estimate to 150p from 130p but said earnings expectations would not be changing on the back of the results.

Read ARM’s statement here.

Friends Provident led the FTSE 100 risers after annual new business figures from the insurer came in above City expectations, up 21 per cent at £5.39 billion. The most optimistic analyst forecast was for £5.36 billion.

UK pensions contracts provided the strongest growth, up 47 per cent, although much of this came through on lower margin products. Williams De Broe, which had a 230p target on the share, reckoned this year’s flotation of Standard Life will benefit Friends as it will provide a stock market peer for the company.

Friends shares were ahead 5p to 199.25p. Chart them here.

Imperial Tobacco took on 15p to £16.92 after a reassuring AGM statement. The maker of Lambert & Butler and Rizla papers said trading has remained in line with expectations and volume trends seen in the second half of 2005 continued into the new year.

Deutsche Bank raised its share-price target on Imps to £19 from £17.50. The broker said that, while its earnings forecasts remained unchanged, the statement provided enough confidence to roll 2007 estimates into its discounted cashflow valuation.

A share buyback, increased to £600 million from £450 million, also gave further evidence of management’s “commitment to shareholder value,” Deutsche said. It repeated “buy” advice.

For detailed information on Imperial Tobacco, click here.

Oil producers did most to turn the market negative, having earlier provided its main line of support. Profit-taking was triggered by decline for their US peers and a moderating oil price, leading BP to close down 6p to 676p.

Shell managed to hold on to a 14p gain at £20.16 ahead of its year-end trading update due Thursday, which should set a record profit for a quoted UK company.

Merrill Lynch reckoned that earnings from ExxonMobil and others have provided a positive read-through for Shell and BP because the European groups rely to a large extent on their American refining and marketing operations. These units have proved to be market’s sweet spot so far in the US earnings season.

That led Merrill to recommend investors play the looming European earnings season through the oil majors rather than the independents, which have higher exposure to less buoyant Asian and European markets.

In the futures pits, New York’s benchmark oil future drifted below $68 a barrel after OPEC oil ministers concluded their meeting in Vienna with a decision to hold steady its official (and ignored) production ceiling. For its part, Iran said it would cut oil exports because international pressure over its nuclear ambitions.

Track today’s trading by industry sector here.

It was not all good news for oil investors: Regal Petroleum lost 70 per cent of its value after a Ukraine court found at appeal that the company’s production licences were not valid.

The court upheld a claim by state oil company Chernigivnaftogasgeologia (or CNGG, preferrably) that the Ministry of Environmental Protection did not follow the correct procedure in awarding Regal licences from within a former joint venture. Regal immediately launched a second appeal.

This setback is not Regal’s first. The group -- founded and formerly run by Vasalie “Frank” Timis, who has two convictions for possessing heroin -- confessed last year that a Greek prospect estimated to contain around 227 million barrels of oil turned out to be yield only hot air.

Regal stock had been trading as high as £5 less than a year ago. Today, they sank a further 77.25p to 34.75p. Stock watchers reckoned that, even including cash reserves worth 15p a share, it was a challenge to find guaranteed assets worth more than about 20p apiece.

For more on Frank Timis, click here.

Back on the main markets, Tullow Oil rose 5p to 313.5p after it gave an upbeat view of the current year. The firm said it should average 68 million barrels of oil per day and revealed that hardware had been hired for a new prospect at its Kudu gas field in Namibia.

“In line,” reckoned most analysts, although Peel Hunt disagreed. The broker moved to “hold” from “buy” on Tullow and cut forecasts.

Still, Dana Petroleum moved ahead 7p to 996.5p in the slipstream. Dana acts as minority partner on a Senegalese field owned by Tullow.

Meanwhile, Premier Oil climbed 20p to 920p after revealing a possible new gas discovery at the Macan Tutul well in Indonesia, where it has a 29 per cent interest. Oriel Securities reckoned the find could be worth about 15p per share.

For detailed information on Premier Oil, click here.

Steelmaker Corus drifted 1.75p to 69.75p after Credit Suisse traders cleared out the last in a line of 136 million shares, equivalent to just under 3 per cent of the total. The broker found sufficient buyers at a price of 71.5p apiece, and now holds about 4.3 per cent of Corus.

Credit Suisse has in the past worked on behalf of Alisher Usmanov, the Russian tycoon who in 2004 built a 13.4 per cent stake in Corus but failed to get his own representatives on the board. According to dealers, he could have shifted most of the stake to Credit Suisse in a hedging arrangement, with the Swiss broker selling the holding as Mr Usamanov’s contracts lapse.

For detailed information on Corus, click here.

Environmental services company Fountains warned that its annual results will be substantially below market expectations. Shares sank 27p to 110.5p after the group said first-half trading to March will be about £1 million.

Read Fountains’ statement here.

Ryanair was easier by 0.28 euros to 7.73 euros and EasyJet fell back 10.25p to 376p. Citigroup, the world’s biggest broker by most measures, cut both stocks off its “buy” list on concern that 2005 could be “as good as it gets” for the European airline sector.

Citigroup argued that 2005 full-year results season should be strong for the airlines after they cut operating costs and managed to pass on rising fuel prices to customers with “surprising ease”. However, it argued that a 9 per cent sector gain last year means the earnings recovery has already been priced into many stocks.

Citigroup’s downgrade of Ryanair was based on valuation. It expected the Irish carrier’s earnings growth to slow to 6 per cent in the year to March 2007, from 12.5 per cent this year, and highlighted that fuel hedging contracts expire in April, creating more risk of disappointment.

On EasyJet, the Citigroup team was cynical that the company could be a takeover target. It argued that bidders would be put off by 40.5 per cent stake held by Stelios Haji-Ioannou and his family. And Icelandic investor FL Group, which has been rumoured as a predator after building a 16.2 per cent interest in EasyJet, could just as easily sell out and double its money.

Elsewhere on broker watch:

Credit Suisse started Wellington Underwriting with an “outperform” and rated insurance peers Catlin, BRIT and Hiscox all “neutral” in new coverage.

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

Morgan Stanley late yesterday cut Stagecoach to “underweight” from “equal weight” and raised First Group to “equal weight” from “underweight”.

Deutsche Bank yesterday moved ISoft to “hold” from “buy”.

Panmure Gordon raised ARM Holdings to “buy” from “hold” and cut First Choice to “hold” from “buy”. Northgate was moved to “buy” from “hold”.

Altium moved to “reduce” from “hold” on Kensington.

Seymour Pierce was busy. It cut Antofagasta, Electrocomponents and Hays to “underperform” from “hold”, lowered Capita, Mouchel Parkman and Waterman to “hold��� from “outperform, and raised Amec and Business Post to “outperform” from “hold”.

Bridgewell moved to “neutral” from “overweight” on Misys.

And ICI was moved to “reduce” from “neutral” at UBS.

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