Weaker tobacco and retailers drag London lower

Investors in London on Monday were considering their next foray into the market, aiming to avoid the worst effects of the falling dollar.

The FTSE 100 was down 0.5 per cent at 4,722.8 while the FTSE 250 index was down 0.3 per cent at 6,635.5. Volume was 2.1bn shares.

Traders were fairly sanguine about the falls, attributing the lacklustre session to a typical Monday’s trading. “We’ve pretty much been at the same level for the last three weeks. There’s been no aggressive selling. We’re just not rising,” said one dealer.

Closer attention was also being focused on the prospects for the new year as several US brokers published their forecasts for the new year.

Goldman Sachs said the UK equity market price/earnings ratio was back in line with its long-term average. “On a cash and earnings yield basis, the UK market appeared to offer good value relative to bonds,” it said.

The continuing fall in the dollar, often seen as bad news for equities, was again debated, although analysts were quick to point out that it was not all bad news.

Deutsche Bank suggested a 5 per cent weakening in the dollar against sterling would result in a fall of 3.2 per cent in UK corporate earnings, with technology, oil & gas and industrial goods & services the most affected.

The mobile phone group MM02 climbed 1.1 per cent to a fresh all-time high of 120.25p as investors debated its prospects. Investec raised hopes that customer growth numbers for its German operations in January would be far better than hoped. Germany had been the cloud over mmO2’s share price, with the management having been saddled with the loss-making Viag Interkom business when it demerged from BT Group in November 2001. Although it faced calls to sell the business, mmO2 kept hold of it and has steadily been turning it round.

Investec analyst Christian Maher said the German unit was still clearly undervalued and saw several catalysts such as lower handset subsidies and strong customer growth in a market where mobile penetration levels are still lower than many other European countries. Other rumours suggested that 02 was second, behind Hutchison Whampoa’s 3, for new UK connections.

Engineering company Smiths Group rose 2.4 per cent to 785p after it announced the acquisition of Medex, a privately-owned US medical devices company, for $925m.

Observers applauded Smith’s use of its strong cash flows to acquire a company which is expected to increase Smiths Medical’s division sales by one third and profits by almost half.

Joint house broker Cazeove said: “Strategically this is the type of acqisition that management has sought and investors have wanted.”

Tobacco stocks moved lower after Deutsche Bank cut its recommendation to “hold” for both British American Tobacco, down 0.4 per cent to 886p and Imperial Tobacco, off 1.1 per cent at £13.67.

“We continue to believe that the tobacco industry will provide superior returns for shareholders,” said Gerry Gallagher of Deutsche Bank. Deutsche said it expected to see cash flows used to generate value through mergers but once that process was completed, cash would be returned through share buy-backs.

BAE Systems fell 4.6 per cent to 245.5p as the aerospace and defence group warned about pressure on profit margins for its Customer Solutions & Support business group next year.

Clive Forestier-Walker said that the current consensus estimates for earnings per share growth of 21 per cent in 2005 were “totally unrealistic” and following the margin warning, earnings growth was likely to be around 6 per cent. See more on BAE Systems

Travis Perkins, the building supplies group, firmed 4.1 per cent to £14.88 on rumours that it was interested in buying privately-owned DIY chain Focus Wickes for £1.5bn.

Select retailing stocks moved lower amid concerns about tougher competition in the run up to Christmas as more stores introduce price markdowns.

“We have short-term concerns about the clothing market,” said Iain McDonald of Numis Securities. “Soft demand, rising capacity and a wounded M&S make for a dangerous combination and we expect to see further markdown activity both before and after Christmas.”

Marks and Spencer shares fell 1.5 per cent to 333.75p after Numis chopped its price target to 300p from 400p. Next fell 0.6 per cent to £16.45 after its price target was cut to £15.75 from £17.50, while Woolworths lost 1.1 per cent to 44.5p after its target was cut to 40p from 50p.

PHS Group rose 4.3 per cent to 72.5p on hopes the workplace services group would announce a share buyback or hike its dividend in its interim results today.

Northgate Information Solutions fell 5.2 per cent to 64.25p amid disappointment that the software company did not increase its earnings guidance for the full year following a strong set of interim results.

Sci Entertainment climbed 10.5 per cent to 226p, a near four-year high, after upbeat full-year results. The group is also in talks with a publisher about a Japanese distribution deal for its game ’Constantine’.

MicroEmissive Displays Group added 8.3 per cent to 150p as it emerged that long-term investor 3i, the venture capital group, had a 13.1 per cent stake following the technology group’s initial public offering last week.

Indian Outsourcing Group jumped 190 per cent to 14½p as it debuted on Aim following a placing of 5m shares at 5p per share by Durlacher. Investment company Blue Star Capital, which took a 56.7 per cent stake in the company, rose 1.9 per cent to 13.5p.

Churchill China fell 10.5 per cent to 221½p as the ceramics manufacturer warned that weaker US and European demand meant profits would be below market expectations.

First Calgary Petroleums rose 8.9 per cent to 701p after reports said Norwegian state-owned oil group Statoil was a leading contender to buy the Aim-listed group.

Pipex Communications, the telecoms group, was up 8.3 per cent at 8.1p as it announced the launch of a voice over internet protocol product to business users.

Jarvis shares lost 18.6 per cent at 8.75p as the troubled support services group admitted it did not have sufficient working capital for its present requirements over the next 12 months and that in the absence of a refinancing, emergency funding would be required by the second half of January. See more on Jarvis

Ultra Electronics rose 2.7 per cent to 685p as the defence electronics group announced a pair of contract wins. Ultra said it had been awarded a contract by Rolls-Royce worth in excess of £23m for control and instrumentation equipment for the Royal Navy. Ultra also said its Ocean Systems business had been selected by the US Navy to contribute to its torpedo defence system in a programme potentially worth $18m over two years.

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