Market Report: Downbeat analysts hurt microchip duo

The UK microchip designers Imagination Technologies and Arm Holdings were shaken yesterday after a downbeat note from UBS. David Mulholland at the bank said FTSE 250-listed Imagination, which designs mobile graphics and microprocessor chips, is set to see a decline in business from major customer MediaTek.

Mr Mulholland thinks MediaTek, which licenses designs from Imagination to build smartphone and tablet semiconductors, will diversify its graphics chips, adopting Arm designs alongside Imagination’s. While licensing fees will remain unchanged, it means royalties will be hit as fewer Imagination chips make it into finished products.

With first-half results due next month, Mr Mulholland reiterated a sell rating, and Imagination slid 6.7p to 263.2p. Arm also fell as Gareth Jenkins at UBS warned investors that graphics chips have a lower “stickiness” compared with processors, meaning customers may chop and change. Arm fell 6.99p to 969p.

The outsourcing giants G4S and Serco were in trouble after the Serious Fraud Office confirmed it has opened a criminal investigation into the pair over electronic tagging contracts. It follows an audit earlier in the year that suggested the companies overcharged the taxpayer by billing for tagging criminals who were either dead, in jail or not tagged in the first place. G4S dropped 0.9p to 253.8p while Serco fell 6.5p to 545.5p.

Aerospace engineer Meggitt continued to fall after warning on Friday that profits for 2013 would be hit by a slowdown in trading activity. Jefferies called the company “the principal laggard within the UK industrials sector”, as the shares dropped 14.4p to 494.5p.

Turbulence at Ryanair pushed the FTSE 100’s airlines into freefall yesterday, after the budget carrier issued its second profit warning in as many months, saying downward pressure on fares would hit profits.

The announcement knocked the confidence of the wider travel sector, with easyJet and British Airways owner IAG both slipping. EasyJet lost 52.9p to 1243p while IAG fell 5.6p to 348.2p. Travel agent Thomas Cook also took a battering, dropping 3.9p to 140.5p.

Troubled Indonesian miner Bumi finally got some good news from scribblers at Liberum. The business’s founders, the Bakrie family and Nat Rothschild, have been warring over what to do with the company for months, but a split from the Indonesian family is now on the cards. Richard Knights at Liberum is expecting good news on the split’s progress after interim results were pushed forward by a week.

Mr Knights said: “The big news to our minds is the acceleration of publishing of these results, suggesting the separation deal may well be completed before year-end.” Mr Knights rated Bumi a buy and the company added 7.5p to 202p.

The wider mining sector was also buoyant. Anglo American was up 25p to 1485p after it completed the sale of its Amapá iron ore operation to Zamin Ferrous following regulatory approval. Antofagasta added 18.2p to 855.2p and Rio Tinto jumped 105.5p to 3289.5p, with both among the FTSE 100 index’s biggest risers. The index added 28.88 points to 6763.62.

HSBC shot to the top of the climbers after a strong set of third-quarter results. Despite revealing that it had been dragged into an ongoing currency fixing probe, the bank’s investors cheered the news that profits soared 30 per cent in the quarter.

But Michael Hewson, chief market analyst at CMC markets, said: “While on the face it, the numbers look good, revenues were down from the same period a year ago, even though profits were higher, suggesting that the cost savings programme is driving the improvement, and not an increase in turnover.” HSBC jumped 14.75p to 702p.

Royal Bank of Scotland slid after a downgrade from Oriel and price cuts by UBS, Société Générale and Barclays. Vivek Raja at Oriel reckons that “the accelerated loss of ‘bad bank’ assets will dilute long-term shareholder value” and squeeze profits. RBS fell 8.3p to 331.7p.

Scribblers at Panmure were keen on Countrywide, the estate agent. Keith Baird at the broker reiterated his buy rating and upped his forecast for growth in transactions. Countrywide added 8p to 559p.

Buy: BT

Tune in to BT, say the analysts at HSBC. After a strong set of results last week that highlighted customers flocking to BT’s new sports channel, the bank reckons “content investment is showing early signs of vindication”. The UK fixed-line market also continues to be attractive. HSBC sets a target of 440p for shares that closed yesterday at 377.2p.

Sell: Telecity

Ditch Telecity, says Liberum. The data centre company yesterday said it was on track to meet targets after winning the highest number of orders for any quarter this year in the last three months. But Liberum says the list of doubters is growing in the face of “lacklustre” returns, increasing concern over capacity and pricing, and the surprise departure of the chief financial officer last week. It sets a target price of 720p for stock currently at 740p.

Hold : Glencore Xstrata

Goldman Sachs thinks investors should hang on to commodities giant Glencore Xstrata, saying the mining and trading group remains attractive on two key fronts: it is well-placed to grow earnings, and has a strong free cashflow. Goldman thinks it is one to watch, and puts a target price of 355p on stock at 335.4p.