Market Report: 'Sell' note puts pressure on Bradford & Bingley

Merrill Lynch certainly did not pull any punches in its investment note on Bradford & Bingleyyesterday. It bluntly told investors to sell the stock and set a fair value target of 254p.

Merrill Lynch certainly did not pull any punches in its investment note on Bradford & Bingley yesterday. It bluntly told investors to sell the stock and set a fair value target of 254p. The US broker worries that the sales outlook for B&B's lending and savings operation is starting to weaken and noted that the banks return on equity is far from impressive when compared with its rivals. B&B's average return on equity stands at 14 per cent, well below the 20 per cent average of the wider UK banking sector.

Traditionally, the lender has been seen as a takeover target and this has supported the group's shares for a long while. But Merrill is far from buoyed by the bid story. "We are now less convinced that B&B is likely be a takeover target in the near term, while our concern about the underlying business outlook has increased", the US broker said.

Trading at a 7 per cent premium to its peers, Merrill believes B&B shares are clearly overvalued and suggested that a discount would be more appropriate. "Not only does B&B offer the weakest earnings profile among UK banks, with almost no earnings growth expected over the next three years, but the company's dividend growth is also far from certain", said the broker.

Since its float three years ago, B&B shares, down 3p to 274.5p yesterday, have under performed the UK banking sector and Merrill is of the view that this will continue into the future. Meanwhile, other banking players were also under pressure. HSBC dropped 5p to 805p, Lloyds TSB gave up 2.5p to 436.5p and Standard Chartered fell 9p to 889p. Abbey National retreated 5.5p to 477.75p as talk of a return bid from Banco Santander waned. The FTSE 100 index had a quiet final session of the week, rising 12.5 points to 4,505.8p.

GUS added 11p to 865p after UBS upped its price target on the retail conglomerate to 975p from 925p. The Swiss broker also raised its earnings forecasts for GUS to take account of the strong performance at its Argos division. HIT Entertainment rallied 5p to 215p after Thursday's profits warning. Helping the stock higher was Merrill Lynch, which argued that the post profits warning drop in HIT's share price was overdone.

Something of a buzz surrounded ITV ahead of its trading statement next week. Although the stock ended the day 0.25p higher to 111.5p, dealers reported rumours that June has been a disappointing month for the broadcaster. Investec Securities dismissed such talk and said it believes June has been a good month for advertising revenues at ITV.

Signet ticked 0.25p higher to 117.5p following the purchase of 20,000 shares at 117p by Dale Hilpert, a non-executive at the jewellery retailer. There was also director share buying at Cairn Energy, 10p better at 1,200p. Norman Murray, the chairman of the oil explorer, picked up 10,000 shares at 1,185p and took his total holding to 80,000 shares. Cairn's stock has more than tripled since the start of the year and most in the City were expecting to see directors selling down their holdings not adding to them.

EMI gained 8.25p to 234p on revived hopes of a merger with rival Warner Music. The excitement was caused by reports that the European Commission is set to clear the Sony-BMG music joint venture, which would reduce the numbers of major players in the music industry from five to four. If EMI and Warner were to merge, analyst estimate that the combined company would have a global market share of 26 per cent compared with 25 per cent for Sony-BMG. The EU will next month announce its decision on the proposed Sony-BMG tie-up.

JKX Oil & Gas added 5.5p to 102p on whispers that the group will soon issues some positive findings from one of its sites in the Ukraine. Desire Petroleum soared 33 per cent, or 6.5p to 26p, as rumours of a major oil find by the group circled dealing rooms. Desire is dedicated to finding oil in the Falkland Islands and in December the group raised £7.1m via a placing at 10p to fund its activities. Greenwich Resources rose 0.5p to 2.75p while Westmount Energy put on 5.5p to 68p. Both are shareholders in Desire.

ITM Power dropped 2p to 46p as the market struggled to absorb a large sell-order, believed to have come from a hedge fund. Alexon jumped 5.5p to 341.5p on heavy institutional demand for the retailer. According to gossips, trading at Alexon has been robust over the past few months. ML Laboratories, unchanged at 17p, disclosed that David Kirch, the Jersey-based property tycoon, had upped his stake in the biotech group to 3.1 per cent via his Channel Hotels and Properties investment vehicle.

And finally, evidence of stake building at Pilkington's Tiles sent shares in the floor coverings group up 0.5p to 3.75p. Along with its ongoing business, the group is believed to own a piece of prime property in Poole, Dorset, which is ripe for redevelopment.

MARKET MOVERS

Rentokil Initial 148.25p (up 3p, 2.1 per cent). Positive comments from Morgan Stanley boost the pest control specialist.

Tesco 268.25p (up 5.25p, 2.0 per cent). Analysts upgrade their estimates after a strong trading statement from the supermarket giant.

Dixons 163p (up 2p, 1.2 per cent). Investors await full-year results from the electrical goods retailer next week.

Carnival 2,580p (up 25p, 0.9 per cent). Deutsche Bank ups its price target to 2,850p from 2,700p and reiterates its "buy" rating.

Lonmin 991p (up 22p, 2.3 per cent). Sells its 2.6 per cent stake in AngloGold Ashanti for $204m.

Xaar 88.5p (up 6.5p, 7.9 per cent). Boasts that its first-half results will beat expectations and says the outlook for its business is positive.

Aggreko 161p (up 2p, 1.3 per cent). Investors warm to the group's trading statement.

Exel 719p (up 5.5p, 0.8 per cent). Raises $39m from the sale of shares in US business Sirva.

Misys 197p (down 17p, 7.9 per cent). Trading statement from the software group disappoints the City.

Wilson Bowden 1,025p (down 25p, 2.4 per cent). The house builder hints that the property market may be starting to cool.

Kenmare Resources 17p (down 2.25p, 11.7 per cent). Announces plans to raise $366m via a mixture of debt and equity, which it will use to develop its interest in Mozambique.

Business Systems Group 12p (down 1.5p, 11.1 per cent). Full-year results from the group fail to impress investors.

Sygen International 40p (down 4.75p, 10.6 per cent). Warns that trading during the second half of its year has been weaker than expected.

Henlys 0.62p (down 0.2p, 24.4 per cent). Investors expect there to be little remaining value for shareholders once the group's refinancing takes place.

Scottish & Newcastle 442.5p (down 1.5p, 0.3 per cent). Slight nervousness ahead of next week's trading update.