Amec followed the London market lower on Tuesday as analysts raised concerns about its acquisition policy.
According to Morgan Stanley, Amec has been holding about $1bn of excess cash since 2007. “With debt paid off, no plans to increase the dividend pay-out ratio, acquisitions appear the only remaining option,” it said.
However, the engineer missed its chance to make purchases in 2009 and 2010, when valuations were still low. “With oil trading at around $100 a barrel and most oil service stocks at all-time highs, we see a risk Amec will acquire at demanding multiples or leave the cash idle,” said analyst Martijn Rats.
He argued that, unless Amec changed its dividend policy or found reasonably priced acquisitions, the $1bn cash pile was of little value to shareholders. That led Morgan Stanley to downgrade Amec to “underweight” with a valuation of £10.80 in a note sent to clients overnight. The shares lost 1.2 per cent at £11.90.
Mining stocks led the wider market lower, sending the FTSE 100 down 0.4 per cent, or 23.01 points, to 6,037.08. For a second day, traders reported problems with London Stock Exchange pricing including a delay to the closing auction.
Anglo American ended down 3.8 per cent to £33.07 after Citigroup cut the stock from its “buy” list on valuation grounds. Fresnilloslipped 2.8 per cent to £14.47 and Rio Tinto lost 2.1 per cent to £45.83.
Ferrexpo was down 1 per cent to 423¼p in spite of news that Vorskla Steel, a start-up founded by its main shareholder Kostyantyn Zhevago, would begin operations by 2014. Vorskla Steel would likely buy a third of Ferrexpo’s annual output, analysts said.
Banks found support on the back of solid results from Barclays, up 5.8 per cent to 328¼p. Royal Bank of Scotland took on 2.2 per cent to 45¼p and Lloyds Banking Group rose 1.8 per cent to 66¾p.
Having hit a new 10-year high on Monday, Arm Holdings dropped by 4.4 per cent to 622½p on news of more directors’ sales. Arm’s chief executive and finance officer said they had sold stock for the second time following results last month. Since the numbers, more than a dozen Arm managers have cut their holdings.
Graphics chip designer Imagination Technologies jumped 16.1 per cent to 394½p on news of its first licence deal with ST-Ericsson. ST-Ericsson, a key licensee of Arm’s rival graphics technology, said it would switch to Imagination for its next generation of processors aimed at high-end smartphones.
Premier Foods rose 16.4 per cent to 25¾p after the Hovis bread maker gained a credit rating, which should allow it to issue a bond and cut its reliance on bank debt. The company, whose net debt stood at £1.26bn at the year end, also posted better than expected profits.
Bid rumours helped Heritage Oil rally from a session low of 280p, with the explorer closing at 299¾p, up 1.8 per cent.
Heritage shares dived last month after the company struck gas rather than oil at its main prospect in northern Iraq. Traders said national oil companies were unlikely to be interested in gas reserves, and suggested instead that the bounce came after an institutional shareholder completed a stake sale that had been depressing the price in recent days.
Micro Focus, the legacy software upgrade specialist, dropped by 26.3 per cent to 291p on its second profit warning in six months. UK franchise holder Domino’s Pizza fell 3.9 per cent to 502½p as weaker-than- expected sales growth for January overshadowed its in-line annual figures.
Ahead of a trading update on Thursday, Cable & Wireless Worldwide lost 3.6 per cent to 73¼p on “sell” advice from Liberum Capital.
“The consensus expects earnings before interest, tax, depreciation and amortisation growth in both the second half and next year, which looks ambitious to us, given falling revenues,” Liberum said. The broker also noted C&W’s use of finance leases to fund capital expenditure, which it said had flattered cash flow by £31m.
Among small-caps, AEA Technology dropped 7.4 per cent to 4.7p after the energy and environmental consultant warned that profits would be hit by the government’s austerity drive.
Russian-focused exploration group PetroNeft Resources moved up 9.7 per cent to 67½p after Canaccord said recent share price falls were not justified.
Forecast-beating annual profit from Barclays brought some relief to London’s banking sector on Tuesday, bringing financial stocks on to the FTSE 100’s leaderboard.
The bank reported a 32 per cent rise in full-year earnings of £6.1bn, up from £4.6bn a year ago and stronger than consensus forecasts of £5.7bn. The numbers benefited from a 30 per cent fall in impairment charges from bad debts, which totalled £5.7bn.
The company’s chief executive, Bob Diamond, warned that a tougher regulatory outlook would mean lower returns in the future, but he pledged to raise return on equity levels from 7.2 per cent in the latest numbers to 13 per cent and to monitor the new target with a “disciplined, rigorous and continued review” of the banks operations.
The strength of the bottom line number was enough to send Barclays stock up 4 per cent to 323.28p, its best closing level since September. It was the strongest showing on the benchmark index.
It was not the only high street bank in the top 10. Lloyds Banking Group was up 2.3 per cent to 67.2p. Royal Bank of Scotland was third, added 2.2 per cent to 45.25p.
“Barclays have kicked off reporting season for the banks with a solid set of full-year numbers,” said Manoj Ladwa, senior trader at ETX Capital. “Having stuck to his guns in front of the Treasury select committee two weeks ago, Bob Diamond seems to have hit the right note with investors as the bank reported well across the board.”
But the market’s overall gain was kept modest by losses in the mining sector after Chinese inflation data restoked worries about the outlook for monetary policy in the economy on which the sector depends for demand for its metals. The biggest single decline in the sector and on the index came from Antofagasta, down 3.9 per cent at £14.28.
Overall, London’s benchmark index slipped 23 points to 6,037.08.
Sandy Jadeja, chief technical analyst at City Index, said: “Although the indices have performed nicely over recent weeks, the current development may be an early warning signal. Right now the FTSE 100 seems to be creating a ... pattern which could potentially suggest that a top may be forming at current price levels.”
Lower down the market, a profit warning from software group Micro Focus International sent its shares down 29.3 per cent to 291p and the bottom of the FTSE 250. The company said “challenging” sales levels to the US federal government had contributed to its problems.
The mid-cap index slipped by 84 points to 11,749.72, a loss of 0.7 per cent.
There was a sanguine market reaction to news that UK price inflation had reached 4 per cent in January as traders had been expecting such a high reading, double the Bank of England’s target. The size of the rise meant the Bank was required to write to the Treasury to explain the policy implications of the data.
Howard Archer, chief UK and European economist at IHS Global Insight, said: “The letter from Bank of England Governor Mervyn King to Chancellor George Osborne ... suggests that interest rates could very well rise in the near term.
“Significantly, though the market is fully pricing in a 25 basis point interest rate hike by May and expects two to three increases by the end of the year, [its outlook] should become clearer with the release of the Bank of England’s Quarterly Inflation report on Wednesday”.