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June 16, 2014 5:46 pm
Earnings and strategy worries meant Rolls-Royce was once again under pressure on Monday.
SocGen recommended selling Rolls, saying 2014 guidance was at risk ahead of an investor update due on Thursday. Its advice follows Rolls-Royce cautioning last month that its sales would be heavily skewed towards the second half.
The broker’s other concern was that Rolls-Royce may not have given up its pursuit of Wärtsilä, the Finnish ship and power plant engine maker.
Rolls-Royce revealed in January that it had made a failed attempt to buy Wärtsilä, then warned on profits a month later. While Wärtsilä has since gained around 20 per cent to trade near a record high, Rolls is down 21 per cent this year.
Any new offer may need to value Wärtsilä at more than €10bn and be funded largely with equity, SocGen said. “A hypothetical deal would be value destroying under most scenarios,” it said. “It would also dilute the group’s civil aerospace business which is a major attraction of the group for many investors.”
Underperforming a falling market, Rolls ended 1.5 per cent lower at £10.05. The FTSE 100 lost 23.21 points or 0.3 per cent to 6,754.64.
London Stock Exchange led the FTSE fallers awaiting finalisation of its Russell Investments acquisition, which is expected to be part funded with a rights issue to raise about $1.8bn. LSE slipped 2.4 per cent to £19.20 amid gossip that the new shares could be priced at about a 6 per cent discount.
The escalating dispute between Ukraine and Russia weighed on stocks such as steelmaker Evraz, down 5.2 per cent to 92p, and Coca-Cola HBC, which fell 1.8 per cent to £13.84. Russia is Coca-Cola HBC’s biggest individual market, accounting for 19 per cent of its 2013 earnings.
BT Group was down 2.4 per cent to 384.9p after reports highlighted a probable rise in its pension fund top-up costs. A three-yearly audit of BT’s scheme due to start next month will probably show a 50 per cent jump in the deficit to about £6bn, the Sunday Times reported.
Smith & Nephew was little changed at £10.70 even after its US peer Medtronic agreed to buy Covidien of Ireland for $42.9bn. Medtronic had previously been reported as examining a bid for S&N.
Barclays reckoned a US peer could justify paying a £15 premium for S&N shares, though the case for a tax inversion would mean moving factories. At least half of S&N’s production capacity is US-based, the broker reckoned, meaning it pays more tax than US-domiciled peers such as Stryker that rely less on their domestic market, the broker said.
Debenhams, which has a trading update on Friday, gained 2.5 per cent to 73p on the back of a Barclays upgrade to “equal weight”. Sales look to have stabilised while earnings expectations have dropped 30 per cent in seven months, with the shares underperforming the FTSE by the same degree, said the broker.
“A recent roadshow we had with management didn’t reveal anything incrementally negative,” said Barclays. “Absent another profit warning (which we do not perceive as likely) we believe Debenhams is now fairly valued on nine times 2015 earnings.”
Barclays also expected an update on Debenhams’ talks with Sports Direct, which six months ago took an option to buy 6.6 per cent of the retailer. Given Debenhams management reckons 10 per cent of its store space is inefficient, any deal to stock sportswear “would seem a reasonable fit”, it said.
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