Market Report: Wm Morrison feels heat from sales slowdown

Rumours that another profits warning could be on the way from William Morrison left shares in the supermarket group at an eight-month low yesterday, down 3.75p to 190.5p.

A number of hedge funds are said to have positioned themselves with sizeable short positions in the stock, in the hope of making a quick buck from what would be a fourth warning from Morrison since its purchase of Safeway.

Many analysts in the City would not be surprised to see yet another setback at the company, given recent market-share data. Morrison is expected to update the market at its annual meeting on 26 May, and yesterday Merrill Lynch was heard urging its clients to exit the stock in the run up to the statement. The US broker said: "Although the shares have already fallen a long way, we believe there can still be one rating: sell."

Merrill believes that the update will offer little respite for the retailer's beleaguered shareholders. It points to last week's Taylor Nelson Sofres data as showing that Morrison's overall sales performance continues to slow. Particularly worrying was the US broker's prediction that even by the end of the year, by which time most of the cost savings of the combined group will have been unlocked and the main refit work done, Safeway will still be loss-making.

Such a scenario would suggest that the losses at Safeway are not merely a transition hiccup but the product of a much deeper problem at the company.

ITV, down 2p to 112.5p, was also hit by profits-warning rumours. News that Deutsche Bank had downgraded its forecasts across the media sector also weighed on the stock and others in the industry. Chrysalis fell 7p to 133p, Emap retreated 16.5p to 751p and Johnston Press gave up 4.5p to 489p as the German broker took a red pen to its estimates.

Deutsche said: "We are cutting our forecasts for UK consumer advertising in light of the recent weak trading update from GCap Media and Chrysalis, plus other evidence of poor UK consumer and advertising demand."

The broker expects UK advertising revenues to grow by just 2.2 per cent in 2005 compared with 4.9 per cent previously. It believes that ITV will be among the worst impacted by this slowdown, but tipped Johnston Press as a relative safe haven in the sector.

Meanwhile, Antofagasta dropped 53p to 1,102p BHP Billiton lost 5p to 648.5p, Rio Tinto gave up 23p to 1,627p and Corus dropped 1.25p to 43.25p on speculation China will soon revalue its currency. Such a development would have the effect of slowing the local economy, which in turn would be very bad news for mining and commodities players. They have benefited greatly in recent years from record demand for commodities from the booming Chinese economy and a revaluation could indicate that the party is over.

A weak start to trading on Wall Street left the FTSE 100 down 17 points to 4,875 on the day. Sage bucked the negative trend among blue chips, gaining 3.25p to 205.25p, after ABN Amro lifted its price target on the software group to 230p from 215p in response to Tuesday's strong interim results.

Exel ticked a penny higher to 837.5p after its rival United Parcel Services, the world's largest packing shipping company, said it would grow earnings by between 16 and 20 per cent in 2005. Earlier this year, UPS was tipped as a possible bidder for Exel. But if anyone is going to buy the UK company, analysts believe Deutsche Post is in pole position to do so. The German group is expected to get shareholder approval next week to raise fresh equity, which would certainly give it the firepower to buy Exel.

Lastminute.com caused some serious pain to a number of punters. Shares in the online travel group soared 45 per cent, or 47.75p to 153p, after it announced a takeover approach. This caught a number of market players off guard. They had been short of the stock because of a rumour that suggested lastminute was in need of fresh cash.

Meanwhile, Lookers fell 6.5p to 310p on fears that car distributors are suffering from the consumer downturn. Its rival Pendragon lost 5.25p to 274.75p while Inchcape fell 7p to 1,786p.

The buy-to-let lender Paragon slumped 23.25p to 358p as Numis Securities hinted that the group will struggle to grow its loan book at the same rate as last year. Should that prove to be the case, Paragon's earnings will undoubtedly suffer. Kensington, another buy-to-let player, gave up 12.5p to 517.5p, despite assurances from the company that it is on track to meet City forecasts for 2005.

Finally, the foundry products supplier, Foseco, will float today, and brokers expect the market to ascribe a value of about £170m to the group.