Market Report: British Airways priced to fly, says Merrill

Benign broker sentiment fuelled British Airways' rise on the benchmark index last night.

The airline's share price has more than halved since the beginning of last year, with investors worrying about the fate of earnings as the global recession depresses the demand for air travel. Recent expressions of gloom by economists and policymakers have done little to improve the mood in the market, with growing anxiety about the prospects of a recovery in the macro picture.

But Merrill Lynch, which added BA to its "Europe 1" list of attractive stocks yesterday, said that while the near-term trading outlook re-mained difficult, there was scope for a rebound in the share price, telling clients that the current "trough valuation" overlooks the potential benefits of further capacity reductions, cost savings and deal activity in the months ahead.

A possible merger with Iberia and a joint venture with American Airlines, coupled with the announcement of a new cost savings programme – which Merrill expects at BA's annual investor day in March – and cuts in capacity and capital expenditure, could drive the share price higher, the broker said, setting a 250p target.

Merrill also expressed confidence in the airline's balance sheet, highlighting the cash balances, the lack of covenant or refinancing risk and committed facilities for the purchase of new aircraft. "We think a combination of BA's low valuation and more positive newsflow over the next 12 months could provide significant upside for the shares," the broker said, helping the stock advance to 142.1p, up just over 2 per cent, or 2.8p.

Elsewhere, Centrica, the energy group behind British Gas, firmed up on chatter that Gazprom was looking to expand into the UK.

The Russian gas giant, which was hosting an event at the London Stock Exchange, was rumoured to be looking at possible acquisition targets, with some traders mooting Centrica as a potential candidate.

Although Gazprom played down the speculation, saying it had not app-roached the company or any shareholders about a possible bid, the stock remained strong, closing 4 per cent, or 11p, ahead at 284.75p.

Overall, the FTSE 100 retreated to 4,213.08, shedding more than 2 per cent or 94.53 points, while the FTSE 250 lost 164.02 points to 6,495.66, with all eyes on the US stimulus package, which was expected to be put to a vote on the Senate floor after the close. The multi-billion package must be approved by the Senate and then reconciled with the version passed by the House of Representatives before it can move ahead.

The delay was mentioned as one reason behind profit-taking in the mining sector, which has rallied in recent days amid hopes of some recovery in the demand for commodities once the stimulus is applied.

Kazakhmys, which has been among the biggest beneficiaries of the recent rally, closed at the bottom of the FTSE 100, losing 9.4 per cent, or 30.5p, to 291p.

Xstrata was almost 9 per cent, or 70p, behind at 724.5p, while Anglo American eased to 1,411p, down 6.6 per cent or 91p.

Banks also gave way as former bosses faced a grilling from MPs on the Treasury Select Committee.

Lloyds Banking Group, which missed out on the sector-wide bounce in the session before, was the weakest again, losing 5.6 per cent, or 5.6p, to 94.9p. Royal Bank of Scotland, which revealed plans to cut more than 2,000 jobs in Britain, was 4 per cent, or 1p, lower at 23.8p.

Also on the downside, sentiment around Tate & Lyle, down 2.9 per cent, or 9.5p, at 320.25p, soured following overnight news that the ratings agency Standard & Poor's had lowered its long-term corporate credit rating for the sugar and sweetener maker.

Cattles, the mid-cap sub-prime lending group, strengthened further, adding 9.4 per cent, or 1.5p, to 17.5p after Evolution Securities said that the company's focus on cash generation "means it is more likely than not" that it will succeed in refinancing its debt.

The transport group National Ex-press was unsettled by JP Morgan, which moved the stock to "neutral" from "overweight", telling clients it was concerned about the company's financial structure. "We see a growing risk that new equity will be required and that the dividend might be cut (to nil, potentially)," the broker said.

It added: "Our view is that new equity will be challenging to gain without resolving the rail loss issues we think it might face." The comments depressed the shares by 10.7 per cent, or 37p, to 308p.

Among smaller companies, the outdoor clothing and equipment specialist Blacks Leisure advanced more than 42 per cent, or 11.2p, to 38p after confirming the receipt of approaches concerning a possible offer for the business.

Avanti Communications, on the other hand, said it had rejected an unsolicited offer approach.

The market seemed to agree with the move, with the shares rising 1.7 per cent, or 3.5p, to 205p.