Tesco stalls as FTSE holds near peak

The OECD did its bit to darken the mood, saying the Federal Reserve may been to raise interest rates again to tame inflation, and that European economic strength means euro-zone rates can afford to be hiked further. But weak UK confidence and services readings bolstered hopes that interest rates may only need one more quarter-point twist.

US markets were closed yesterday for Labor Day, the holiday that historically signals the end to the US market’s summer lull. While UK fund managers traditionally to wait for this weekend’s St Leger horse racing meeting to step back into the market, dealers were reporting that volume and interest from their major clients picking up from seasonal lows. Some 2.5 billion shares had been exchanged through London by the close, not far short of the daily norm.

For an overview of world markets, click here.

Tesco was among the FTSE’s laggards, having reached a record high of Friday as a wider than expected rollout of its Direct non-food catalogue also helped bolster profit forecasts. Industry surveys have also suggested that Britain’s biggest supermarket bounced back from a tricky start to the year, extending its lead position during the summer heat wave.

Today’s worry was that the trend may not be sustainable. The British Retail Consortium said that like-for-like sales grew 2.5 per cent on a year ago last month, weakening from the 3.4 per cent gain in July, with food and drink slowing markedly as the weather cooled.

Grocers’ shelf prices had crept higher in the strong summer market, a trend some industry watchers saw as a ceasefire in the sector’s long-running price war. But Merrill Lynch, Tesco’s house broker, argued that prices and profit margins could be under pressure again as the supermarkets renewed hostilities during the slowdown.

The grocers were likely to be “less gung-ho” about price hikes when faced with moderating sales, Merrill argued. The bank’s team also noted that Tesco shares “are not at their cheapest ever moment”. Still, Merrill saw enough of a summer sales boost to raise forecasts to above-consensus levels, repeating “buy” advice on a 395p price target.

Tesco slid 5p to 375p, while smaller peer Sainsbury was off 4.75p to 356p.

Track today’s trading by industry sector here.

SABMiller featured on FTSE leaderboard as management’s charm offensive around the City began to pay off. Several investment houses were sold on the potential at its Latin American operations, which currently provide just under a quarter of group profits.

Dresdner Klenwort kept an “add” rating on SABMiller after its sales force enjoyed a presentation from the firm’s investor relations department last night, while Lehman Brothers switched to “overweight” from “equal weight”. Both brokers were positive based on growth coming from SABMillers’s purchase of Grupo Bavaria last year, for $7.8 billion.

The Columbian company made just $700 million in 2005, sparking questions over valuation, although SABMiller management has repeatedly stressed that the deal was done to open up key Latin American markets such as Ecuador and Peru.

Lehman’s team, as part of a wider study of the Latin American beer market, reckoned Bavaria could double regional profits within the next five years to over $1.4 billion. It said that increased marketing spend would “help to create a more vibrant beer culture in Colombia and Peru”, and that SABMiller brands such as could gain both a bigger market share and a higher cachet.

According to the broker, there is still minimal price and image differentiation between beer brands in Latin America, with labels positioned regionally rather than by image. SABMiller, which has addressed similar problems in South Africa and Eastern Europe, could move up the value scale by introducing international brands such as Miller and Peroni, or giving the hard sell to local premium labels such as the Andes-brewed Cusquena.

Add in cost savings and that could result in earnings growth across the entire group of 10 per cent per annum, or in the mid-teens on a per-share basis, Lehman reckoned. That growth makes the shares cheap with the current rating, less than 16 times 2007 earnings, only in line with the European beer average, Lehman told clients. It set a share price target of £12.

SABMiller pushed ahead by 4.5p to 1067.5p. Smaller peer Scottish & Newcastle was easier by 3.5p to 563p on whispers of a management shakeup in France, and as Lehman downgraded to “equal weight” from “overweight” on valuation grounds.

A broker tip also helped Carnival, which was higher by 1p to £22.81 thanks to Dresdner Kleinwort. The German bank repeated “buy” advice on the cruise operator based on a channel check of ticket sales.

Dresdner’s analysis suggested that, since the end of July, ticket sales for Carnival Caribbean are down 2 per cent and up 0.8 per cent for the fourth and first quarters respectively on steady pricing. “Taken together we believe the various data points suggest third quarter trading has been no worse than expected,” it said.

Flying closer to the wind, Centrica added 5.75p to 308.25p on a theory that Gazprom executives were taking to its banks about financing of an offer for the British Gas owner. Gazprom, not for the first time, denied it was planning a bid, taking the shares off their best levels.

Rumours of Gazprom’s interest have been doing the rounds for about a year, although management at the Russian natural gas group has repeatedly indicated that Centrica is on the radar rather than the spreadsheet.

BG Group, Centrica’s old exploration and production arm, gained 6.5p to 690.5p on a spivvy suggestion that it could be a predatory target for Shell. France’s Total was also being mooted as a possible buyer for BG, even though it could be tough for any European rival to square a takeover premium against BG’s current valuation of £23.4 billion and its expected 2006 profit of just £3.3 billion.

Mining stocks provided the ballast for the market rally as metals prices continued their new-season rebound, with copper up 5 per cent and gold ahead 3 per cent on fund demand. Metals are a popular speculative play in the last months of any year, as prices can be pushed higher by manufacturers restocking inventories.

Kazakhmys rose 44p to £13.31 as Credit Suisse tipped the stock ahead of what the bank reckons will be record results from the copper miner on September 19. Rio Tinto added 49p to £28.24 and Vedanta Resources took on 21p to £14.21.

Cairn rallied from lows to close higher by 9p to £21.25. Shares traded 90p below that level at the open on news that its biggest oil field would come on stream later than planned.

The oil explorer said production from the Rajasthan field would be delayed to 2009, from an original target of 2007 and the City’s estimate of early 2008, due to tightness in the market for oil services. Management also highlighted some uncertainty over the timing of when an export pipeline will be built, and is examining options to mitigate risk of further delay.

The Rajasthan field provides about 90 per cent of Cairn’s current valuation, with analysts estimating that every year’s delay in their development reduces Cairn’s net asset value by about 2 per cent.

But the good news was that Cairn is on track to partially float of its Indian operations in December, as the City had expected. Details were still patchy, however, with the company not yet deciding how what size of stake it will sell. It has the option to sell anything between 25 per cent and 80 per cent of the Indian venture.

For more on Cairn, click here.

Electronics retailer DSG International rose 2p to 209.75p as SocGen became the latest broker to upgrade ahead of its update on summer trading, due at annual general meeting. Analysts expect the Currys owner to show group sales growth of about 12 per cent from last year’s depressed levels, as the World Cup helped sales of more affordable flat-panel TVs.

As ever with DSG, investors will also be keen to hear whether management intends to make a move for Eldorado, Russia’s leading electronics chain. The UK group has an option to acquire Eldorado before 2011 for a fixed price of £1 billion.

“Buying 20 per cent-plus of the Russian market is likely to prove irresistible,” SocGen reckoned. The French bank moved to “buy” from “hold on DSG shares.

Mid-cap Matalan rallied 12p to 182.75p after its half-year sales proved better than feared, with same store sales improving against weak comparisons last year. The shares had been sold back yesterday on doubts over whether sales would meet expectations, and what that could mean to the bid interest from John Hargreaves, Matalan’s majority shareholder.

Mr Hargreaves has been working on a bid for Matalan potentially worth close to 200p per share, the deadline on which was recently pushed back to October 11. Company watchers have wondered whether he can raise more than 170p per share through normal banking sources, meaning the rest has to come from his own pocket.

Today’s release from Matalan seemed very keen on stressing value to anyone financing a deal, highlighting a sharp recovery in refurbished stores at least £45 million of working capital savings by the year end. Still, analysts at Semour Pierce reckons Mr Hargreaves will struggle to bid more than 185p, and stands to lose out if he walks away as the shares would fall to around 140p.

Credit Suisse, maintaining “underperform” advice, added: “The positive mix of both the trading performance and improved efficiencies should drive the shares higher in our view in the context of the current potential bid situation. That said, we feel that some scepticism will undoubtedly linger on a potential bid and its financing for what in our view remains a structurally challenged business.”

Plant hire firm Ashtead jumped 16p to 148p after better than expected first quarter trading at its Sunbelt US unit countered the effects of a weaker dollar. Ashtead’s profit before tax totalled £24.3 million, up 98 per cent and beating the City consensus forecast of about £19 million.

A-Plant, Ashtead’s UK division, provided another positive with sales rebounding following a change of strategy last year. Cazenove, which raised forecasts, said the shares’ rating of 10.5 times current year earnings “represents very good value,” adding that investors are “gradually coming to the view that the US market continues to be strong and should remain so for the coming year at least”.

On broker watch:

Panmure Gordon raised Matalan to “hold” from “sell” and cut Stanley Leisure to “hold” from “buy”.

Evolution Securities raised Kingspan to “buy” from “add” and downgraded Stanley Leisure to “reduce” from “add”.

Bridgewell raised Local Radio Company to “overweight” from “neutral” and started Kesa with “overweight” advice.

Goldman Sachs started coverage of EMI with a “neutral” rating.

Deutsche Bank cut Old Mutual to “hold” from “buy”.

ABN Amro downgraded both Amlin and Taylor Nelson Sofres to “add” from “buy”, and cut BBA to “hold” from “buy”.

Dresdner Kleinwort started coverage of Dechra Pharma with a “buy” rating and 310p target.

Peel Hunt cut John Menzies to “hold” from “buy”.

Morgan Stanley raised Pennon to “equal-weight” from “underweight” and cut Severn Trent to “equal weight” from “overweight”. It also moved to “underweight” from “equal weight” on Kelda.

Lehman Brothers removed Northern Rock from its European recommended portfolio.

And Deutsche Bank raised National Express to “buy” from “hold”.