BT rallies as broker sees better times

BT rallied last night, after a leading broker turned positive, citing management's moves to restructure the telecoms group.

Bank of America-Merrill Lynch weighed in, arguing that the various bits of bad news – the problems at the Global Services division and worries about the pension scheme – "should now be priced in", opening the door to share price gains as the company's cost-cutting measures bear fruit. The equity should also benefit from the impact of recent Ofcom reviews, which Merrill said had been favourable for pricing at the company's Openreach and Wholesale divisions.

"BT has taken hits on its Global Services contracts and pension scheme, news which we believe the market has now had time to absorb," the broker said, estimating that the company's targeted headcount reductions alone "should save £900m in a full year and be fully reflected only in the 2010/11 results".

"The company has pulled a lot of levers, including a substantial headcount reduction, pay freeze, new working practices (which are in progress) and revised pension terms as well as extensive changes to the top management at Global Services following writedowns on contact values," Merrill added. It switched its stance on the stock to "buy" from "neutral", with a revised 130p target price, compared with 110p previously. At the close, BT was 4.1 per cent or 3.8p stronger at 96.69p.

Overall, the FTSE 100 was again broadly unchanged, easing slightly to 4,441.95, down 19.92 points. The FTSE 250 was similarly unmoved by the day's activity, falling by less than 1 per cent, or 63.08 points, to 7,691.36.

The banks were in focus, following confirmation that BlackRock, the American money manager, had agreed to acquire Barclays Global Investors in a $13.5bn deal, which will boost Barclays' capital cushion. Barclays shares traded lower in response, easing to 292p, down almost 4.1 per cent or 12.5p, with traders attributing the weakness to profit-taking.

There was also some negative comment from Panmure Gordon, which stuck to its "sell" stance on Barclays, saying that while the short-term benefits of the deal, namely the uplift to both earnings and capital ratios in 2009, were obvious, its concerns were "longer-term". The broker added: "To be clear, we regard the BGI disposal as a long-signalled necessity, in order to boost Barclays' core tier 1 ratios to within spitting distance of its peers. But our longer-term concerns about earnings sustainability and balance sheet risks remain."

Investors also took profits in Lloyds, which was 1.4p lighter at 65.3p, and Standard Chartered, which was 26p weaker at 1,184p despite supportive words from Macquarie, which reiterated its "outperform" rating on the bank's stock.

"For Standard Chartered, the risk to earnings estimates is becoming more positive, with credit quality likely to hold up better than once feared, and market revenues are expected to surprise," the broker said. "We would also note favourable currency movements in some of the key currencies such as the won and rupee."

Elsewhere, the advertising agency WPP was up 1.7 per cent or 7p to 432.5p, after Goldman Sachs added the stock to its "conviction buy" list. "The 9 per cent drop in WPP's organic growth in April suggests we are close to the trough of organic decline, while consensus has fallen closer to our forecasts," the broker said, adding that debt was no longer an issue for the company.

Also on the upside, Man, the London-based hedge fund group, jumped to 282.75p, up 6.4 per cent or 17p, and claimed first place on the benchmark index, amid rumours that it may move to sell its stake in MF Global, the New York-listed brokerage.

On the downside, the insurance group Prudential lost 1.8 per cent or 8p to 439p after ING switched its stance on the stock to "hold" from "buy" in a European insurance sector review, saying the company's new business, particularly from Asia, "seems likely to be less abundant than we previously expected".

The broker also downgraded sector peer Legal & General, which was 0.4p behind at 63.7p after being moved to "sell" from "hold" to reflect what ING said was "the poor geographic spread of its business as well as its unfortunate product mix".

Further afield, on the FTSE 250, GKN was 5.5 per cent or 7.25p stronger at 140.25p after Cazenove repeated its "outperform" rating on the stock, saying that it expected the company's cost-cutting measures and more stable demand to lead to a "sharp bounce in earnings".

RPS was less successful, retreating to 206.5p, down 2 per cent or 4.25p, after Panmure Gordon moved its rating for the engineering design consultancy to "sell" from "hold", saying there was a potential downside of 24 per cent from its 160p target price.

"The shares have bounced +37.5 per cent during the past three months and with downside risk to forecasts, we believe the shares are starting to look expensive, particularly versus peers," Panmure Gordon said.

The Independent, 13th June 2009

Back to News »