Last updated: November 8, 2010 8:41 pm

Dividend doubts weigh on Scottish and Southern

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Dividend doubts weighed on Scottish and Southern Energy on Monday as the FTSE 100 drifted back from a two-year high.

SSE shares lost 1.6 per cent to £11.22 after Nomura said the utility’s balance sheet might be too stretched for an uncertain trading outlook and onerous investment programme.

“We suggest a further rights issue cannot be ruled out, and that a dividend cut is also a possibility (although likely to be strongly resisted by management),” said analyst John Musk.

SSE last month raised £1.2bn with a hybrid bond issue to help shore up its Moody’s credit rating. But falling UK electricity prices have hit profits even as the company spends £1.3bn a year on infrastructure that will not boost earnings until 2014, Nomura argued. “We believe SSE’s poor earnings outlook in the intervening period may play on Moody’s patience,” it said.

And, while SSE has no near-term financing concerns, investors are likely to focus increasingly on its capital structure that is “not sustainable over the medium term,” Nomura said. It downgraded the stock to “reduce” ahead of SSE’s interim earnings due on Wednesday.

The FTSE 100 slipped 0.4 per cent, losing 25.39 points to 5,849.96, as miners and banks retraced some of their recent gains. Royal Bank of Scotland was the sharpest blue-chip faller, down 3 per cent to 43½p, followed by Anglo American , which was off 2.4 per cent to £29.55.

Tullow Oil fell 2 per cent to £12.26 after Goldman Sachs cut the stock to “neutral” on valuation grounds as part of a sector review.

Goldman also downgraded African Barrick Gold , which lost 1.9 per cent to 538½p in spite of bullion hitting a new record. While the miner has the infrastructure and reserves to be a million-ounce producer, management need to tackle operational problems and production may disappoint in the meantime, it said.

Serco faded 2.3 per cent to 560p after S&P Equity Research started coverage with a “sell” rating and 520p target price.

Better than expected quarterly earnings lifted Inmarsat , the satellite operator, to the top of the Footsie gainers with a 3 per cent rally to 695p.

Rolls-Royce recovered 2.7 per cent to 607p after it said the mid-air failure that grounded Qantas Airways’ superjumbos was specific to that type of engine. News of the mid-air blow-out last week sent Rolls shares sinking by nearly 10 per cent.

Invensys extended its rebound following last week’s results, rising 2.2 per cent to 320¼p. Exane BNP Paribas raised its target price to 360p, arguing that a strong performance for the engineer’s automation unit confirmed that “we are at the beginning of a significant sequential recovery in process industry capital expenditure”.

Publisher Reed Elsevier was up 1.9 per cent to 536p after UBS and Investec both issued “buy” notes to preview the group’s trading statement later this month. “Expectations for Reed remain very low and significant concerns remain over the potential for market share losses in the legal business,” said Investec. “We believe this risk is being overstated.”

London-traded shares of Irish Life & Permanent were the sharpest mid-cap faller. The insurer and pensions provider dropped 16.7 per cent to €0.87 as the cost of insuring Irish debt surged to a record high.

Gartmore Group slumped 15 per cent to 107p after its star fund manager Roger Guy retired and chief investment officer Dominic Rossi defected to Fidelity.

Telecity , the data warehouse, lost 2.8 per cent to 463⅔p after Liberum downgraded to “sell”. The need to invest in new capacity would not feed through to earnings before 2013, the broker said. It also argued that bid speculation was misplaced given shares in Equinix, Telecity’s most likely acquirer, have dropped following its purchase of smaller peer Switch & Data. “We believe investors would be reluctant to back another deal,” analyst William Shirley said. Afren dropped 5.5 per cent to 123¾p on news that gunmen had kidnapped five crew at a rig off Nigeria.

 

SMALL CAPS Gains for oil and gas groups

 

Desire Petroleum rose 11.7 per cent to 119¾p after Goldman Sachs started coverage with a “buy” rating and 197p target price.

Desire’s large acreage in the North Falklands basin gives it “substantial running room to drill a significant number of potentially transformational wells over the next few years”, it argued.

Goldman also put “buy” ratings on Falkland Oil & Gas , up 5.8 per cent to 109¾p, and Borders & Southern , 3.4 per cent higher at 68¾p.

Its top pick in the UK was Rockhopper Exploration , up 1.8 per cent to 318¼p.

Petroneft Resources edged up 0.9 per cent to 55p amid hopes of an update from its Arbuzovskaya exploration well in Siberia.

Caledon Resources rose 16.7 per cent to 98p after confirming bid rumours.

Chinese state investment group Guangdong Rising Assets Management agreed to pay 122p a share for Caledon, valuing the Queensland-based coalminer at £252m.

Polo Resources , Caledon’s 27.6 per cent shareholder, added 10.3 per cent to 4.6p.

Hutchison China Meditech was marked up by 6.7 per cent to 552½p after Japanese conglomerate Mitsui invested $12.5m in its drug development subsidiary.

The investment valued the unit at 122p per Meditech share, said Panmure Gordon, which raised its target on the stock to 600p.

Findel , the debt-burdened catalogue retailer, dropped 18.5 per cent to 11p following reports that it was considering a £40m emergency share issue or the sale of its education division.

An interview in the weekend press with Tom Cross, founder of Dana Petroleum, helped stir interest in his new acquisition vehicle Parkmead Group , which rose 38.9 per cent to 9¼p.

Public sector outsourcer Tribal Group , which last week said potential bidders had walked away, lost a further 8.3 per cent to 20¾p on news that Peter Martin, chief executive, would be leaving the company.

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