Last updated: November 8, 2012 4:50 pm

Talk of cash return boosts Croda

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Croda was in demand, outperforming a weak London market, after the specialist chemicals maker reassured on growth and cash returns.

A capital-markets day this week focused on Croda’s investment in new products, which it expects to help accelerate sales growth from next year.

“Returns are not expected to fall, despite rising capital expenditure, and we suggest incremental sales potential of £450m-500m from recent investments,” said Morgan Stanley, the group’s house broker.

Croda also played down worries about its personal care business, which was the main cause of weaker than expected quarterly results last week. It blamed destocking but saw no sign that end markets had weakened, as key customers such as L’Oréal and Beiersdorf were not cutting research spending.

“Given Croda’s strong balance sheet we see the potential for a £350m cash return over 2013/14 through a share buyback,” said Goldman Sachs. It had a £31.50 target price on the stock, which closed up 1.3 per cent to £22.10.

A number of earnings updates left the wider market directionless, with the FTSE 100 ending down 0.3 per cent, or 15.58 points, at 5,776.05.

G4S dropped 3.1 per cent to 259.2p on news that Wolds prison in Yorkshire, which it has been running since 1992, would return to public sector management. The group, which in August had been criticised in an Her Majesty’s Inspectorate of Prisons report, also failed to make the shortlist for five more prison contracts.

Barclays analysts suspected a government strategy shift that would be negative for the services sector. “It effectively signals a smaller revenue pot skewed towards lower-margin work for future prison outsourcing,” said the broker.

Interserve slipped 5.5 per cent to 368.2p on news that all three prisons it was bidding for would be kept under public management. Serco , which was in line to overtake G4S as Britain’s biggest prison contractor, lost 1.9 per cent to 558p.

Engineering services companies dropped on a profit warning from Balfour Beatty , which warned of a sharp deterioration in UK construction demand.

“Fundamentally, the larger projects where the group could differentiate itself are not coming through,” said Investec Securities. “As a result, 50 per cent of the order book is now regional work, and we believe the risk is now all on the downside for this business.”

Balfour dived 18.3 per cent to 250.1p, WS Atkins was down 5.6 per cent to 677.5p, Carillion lost 4.3 per cent to 296.7p and Kier Group was 2.2 per cent lower at £12.05.

ENRC was weakest among the miners, losing 3.4 per cent to 294.6p after it cut spending and cancelled an iron ore project in Brazil. Production figures were in line but net debt increased by $500m to $3.9bn over the quarter, raising fears of a cash call to bolster the balance sheet.

Pennon fell 2.2 per cent to 677.5p after Goldman Sachs downgraded it to “sell”. Investors were overvaluing earnings growth from energy-from-waste projects and ignoring the potential increased volatility in earnings, Goldman argued.

Nomura Securities also turned negative on the water sector, citing regulatory risk and stretched valuations. United Utilities edged 0.2 per cent lower at 659p and Severn Trent was down 1.3 per cent at £15.17.

Rumours of takeover interest in the water utilities looked “plausible” but had already been reflected in share prices, with United and Severn both pricing in a one-fifth probability of a bid within the next six months, Nomura said.

Dialight , the richly valued LED lighting maker, dropped 5.7 per cent to £11.15 after cautioning of a contract delay for its division that installs warning lights on skyscrapers. Investors were also disappointed by a lack of upgrades for Dialight’s industrial division, its main source of growth.

Software maker Fidessa bounced from a two-year low, up 2.2 per cent to £13.35, amid talk that a stock overhang had been cleared. The sketchiest of takeover rumours helped Speedy Hire , the tool rental group, advance 3.8 per cent to 34.3p.

Pace , also the recent subject of bid speculation, took on 2.8 per cent to 193.4p ahead of a trading update due Wednesday. Plans by AT&T to expand its high-speed broadband network were positive for Pace, given AT&T was its largest customer last year accounting for up to a fifth of revenues, said Espirito Santo.

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