Market Report: Broker helps Vedanta to pull ahead of peers

Vedanta Resources outperformed the mining sector last night, rallying after a leading broker said the stock could more than double without the need for material changes in spot commodity prices.

Morgan Stanley said Vedanta, which touched a session high of 2035p before ending up 46p at 1948p, could climb as high as 6800p if its "bull case" came to pass. "Vedanta's [capacity for the second half of 2009] is worth around £17 per share alone on our estimates. Yet our bull scenario, without requiring heroic assumptions, values the confirmed growth plan over the next 24 months at around £15 per share, and operational improvements as part of this investment plan at an additional £20 per share," the broker explained, saying that further tangible growth opportunities and higher commodities could add around £16, "giving our £68 bull case".

In keeping with its bullish view, Morgan Stanley moved the stock to "overweight" from "equal weight", with a revised 2623p target price, compared to 2312p previously. Deutsche Bank also weighed in, reiterating its "buy" stance, and raising its target price for Vedanta to 2300p from 2110p.

Other miners, including Antofagasta, down 36p at 723.5p, BHP Billiton, down 65p at 1643p, and Rio Tinto, down 92.5p at 2576p, closed in line with the wider market after an unexpectedly weak report on US manufacturing sparked concerns about the sustainability of the recovery.

The Institute for Supply Management (ISM) said its index of national factory activity eased to 52.6 in September from 52.9 in August, while economists had pencilled in a rise to 54. Lonmin, the platinum miner, was 136p weaker at 1538p as traders played down the prospect of a bid from Xstrata, which from today is free to launch a new bid at a price lower than the £33 per share proposed last year.

The stock was also hit by some negative commentary from Deutsche, which switched its stance on Lonmin to "sell" on valuation grounds, saying the recent share price rally was "unjustified" and that "near-term earnings are likely to disappoint due to lower than expected production". The broker added that recent bid speculation was "overdone". At the close, Xstrata was 50.5p behind at 872p.

Overall, the FTSE 100 began the new quarter on a sour note, retreating to 5047.81, down 1.7 per cent or 86.09 points, while the FTSE 250 fell to 9064.28, down almost 1 per cent or 78.03 points as the US ISM data, and attendant worries about the recovery, depressed sentiment.

David Jones, the chief market strategist at IG Index, said that despite the day's falls, "the medium sentiment remains positive". "It would take a slide back below 5,000 to start sowing some more permanent doubts in traders' minds about the possibility of a sharper drop," he added.

On the FTSE 100, Legal & General, which has been the focus of bid rumours all week, touched a session high of 94.4p, but closed up just 0.15p at 87.95p, after Panmure Gordon weighed in and raised its target price for the stock to 99p from 85p in a sector round-up. Standard Life was 2.8p weaker at 216.2p, as the broker raised its target price on the shares to 234p from 212p, while Prudential eased 9.5p to 592p as it was upgraded to 732p from 585p. Aviva gained 3.6p to 451.7p as Panmure raised its target price on the stock to 526p from 435p.

"We view further consolidation as both desirable and inevitable," Panmure said. "Resolution's acquisition of Friends Provident has acted as a catalyst that should provide further upside at Legal & General."

Elsewhere, Man, the hedge fund group that saw its shares rally on the back of a positive trading statement in the session before, fell back 7.8p to 323.4p as traders banked profits. Citigroup, which raised its target to 350p from 250p, said Wednesday's gains reflected the lack of negative surprises. "We continue to forecast 26 cents [in earnings per share for 2010], although the mix between management and performance fees has changed slightly," the broker added.

In the banking sector, Lloyds was more than 4 per cent or 4.47p behind at 99.23p after Execution's analyst Joseph Dickerson reiterated his call for the bank to opt out of the Government's Asset Protection Scheme.

"Our conviction is high that, in leaving the APS entirely, Lloyds will see a material decline in its wholesale funding costs," he said, reiterating his "buy" stance on the shares. State-backed peer Royal Bank of Scotland, which is rated "sell" at Execution, retreated 2.4p to 50.55p.

Further afield, Segro fell 20.2p to 347.3p, after Goldman Sachs moved the commercial property group's stock to "sell" from "neutral" in a new sector review.

"Segro shares have been among the strongest performers in the European real-estate sector over the past three months, rising 44 per cent, and outperforming our coverage by 11 per cent. We believe that this is in part due to the benefits of its acquisition of Brixton," the broker said. "However, we believe that the market is now pricing in a faster recovery in its mostly industrial portfolio than is likely to happen."