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FTSE dips on eurozone and oil price concerns, while Primark caution hits ABF shares

Leading shares edge lower but come off worst levels after US housing figures

On a down day for the market, Associated British Foods lost 1.5% after its latest trading update showed signs of a slowdown at its discount retailer Primark.

ABF, which also owns Silver Spoon sugar, Twinings tea and Kingsmill bread, said like for like sales growth for the first half was expected to be up by 2%, compared to expectations of around 3%. The company said Primark sales had got off to a slow start due to the warm autumn but had done well over Christmas. But operating margins continued to be hit by higher cotton prices, although it expected to see the benefits of a subsequent dip in raw material costs in the second half. Martin Deboo at Investec said:

We read ABF’s first half update as neutral for the consensus. Below the headline level are the usual moving parts, with sugars even stronger and grocery weaker relative to our forecasts. Primark looks to be in line with our expectations at the profit level, but the second quarter like for like looks to have slowed slightly relative to the first quarter.

The first half like for like in Primark is 2%. The first quarter [figure] was not disclosed, but we estimated it at around 3%. So the arithmetic points to a slowdown in the second quarter, which ABF hint at in the update. With positive sentiment on the shares as strong as it has been, we expect any whiff of a slowdown to impact sentiment a bit.

So it did, with ABF’s shares down 19p at £12.

Overall, investors were nervous after an inconclusive G20 meeting at the weekend and stubbornly high oil (Brent crude fell 1% but was still above 4 a barrel). The FTSE 100 finished 19.58 points lower at 5915.5 but came off its worst levels after better than expected US housing sales lifted Wall Street. Michael Hewson, senior market analyst at CMC Markets, said:

European markets have slipped back as markets reacted with disappointment to the weekend outcome of the latest G20 summit. Concerns about rising oil prices acting as a brake on economic growth have also prompted some profit taking on the recent rises in equity prices.

Apart from ABF, a number of other major companies reported results, to a mixed response. Essar Energy fell 18o.4p to 107.6p after its profits came in below expectations, while publisher Pearson dropped 47p to £12.04 following a cautious outlook statement. HSBC lost 21.4p to 553.5p and cast a shadow over the rest of the banking sector. But packaging group Bunzl was at the top of the pile, up 21.5p to 952p after an 11% rise in profits. Investec issued a buy note on the company, which supplies carrier bags and toilet rolls – among other things – to supermarkets, hospitals and hotels. Investec analyst Robert Morton said:

Bunzl has reported a very good set of figures for 2011 with results well ahead of our expectations. Organic growth picked up well in the second half of the year, despite the tough economic background, and with margins improving, operating profits rose strongly over the year. We are raising our forecasts and target price [from 900p to £10.25] and reiterate our buy recommendation for a business that is, in our view, very well managed and a strong core holding in the sector.

Prudential dipped 2.5p to 719.5p after it confirmed reports it may move its headquarters out of London to Hong Kong due to regulatory changes. Barrie Cornes at Panmure Gordon said:

This is not the first time that such a move has been raised, given the size of Pru’s Asian operation. Our concern is this might be a case of sabre rattling ahead of clarification on Solvency II which simply acts to highlight a larger than anticipated negative impact on the business from the anticipated regulatory change. In response to the speculation Pru has released a statement today saying that these sorts of issues are regularly reviewed and that there is no certainty in respect of Solvency II and its implications on the group.

But BP bounced 5.5p to 501.7p on news that a court case involving the Gulf of Mexico oil spill had been delayed to allow all sides more time to try and reach a settlement.

Marks & Spencer added 6.7p to 360.1p after analysts at UBS moved from neutral to buy and raised their target price from 325p to 410p. They said:

Despite recent signs of life, the M&S stock price has been lacklustre since news of the 3-year plan in late 2010. Some may be the result of weaker than expected trading conditions, but as yet there has been little evidence that the new investment strategy is working. Our own estimates (increased today) still undershoot the sales and earnings per share thresholds for long term remuneration. 73% of ratings are neutral or sell.

If we get positive signs on returns in May (e.g., trial stores like for like outperforming, traction in international e-commerce) then we believe the stock will react very positively.

We raised our 2011-2012 pretax profit estimate by 3% to £690m after the third quarter trading update, helped by lower operating expenditure growth. For 2012-13, we nudge up apparel like for like from flat to +1% and gross margin from plus 25 basis points to plus 50. This gives a 2% pretax profit upgrade to £745m even after netting out a lower profit and loss pension credit. 2013-2014 pretax profit rises from £816m o£ 855m as plan gains accelerate.

Our discounted cash flow-based price target rises to reflect earnings per share upgrades, with cash rising faster given the pension credit is non-cash. As a cross-check, M&S currently trades at a small PE discount to peers, despite the potential UK uplift and depressed international base.

Lower down the market Bellzone Mining gained 3.25p to 36p after a positive update on its Forécariah joint venture project in the Republic of Guinea, West Africa, which is on track to begin production and stockpiling of iron ore by end of the first quarter. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds