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Thomas Cook drops by a fifth on downgrade, but FTSE 100 moves higher as EU meets

Travel company cut from buy to hold after a week, as takeover talk fades

Thomas Cook was boosted earlier this week on vague talk it could be a target for rival Tui Travel, although traders pointed out that competition issues made such a move unlikely.

Now its shares have fallen back again following a downgrade by Investec, closing 5.75p lower at 22.5p. Analyst James Hollins said the company’s shares had more than doubled since Investec began coverage with a buy recommendation just over a week ago. Cutting his recommendation to hold, Hollins said:

Our positive stance was based on the prediction that Thomas Cook would survive in its current form, with (1) a supportive banking syndicate, (2) the short-term appointment of a new chief executive [now expected by the end of March], (3) operational turnaround opportunities, and (4) the likelihood of asset disposals. However, the shares now offer less than 10% upside to our unchanged 30p price target and we therefore move from buy to hold.

He said the company’s banks were supportive in the short term, but might demand a reduction in its total debt, which could push the company into mounting a rights issue:

Asset disposals (around £200m organic, around £100m from Thomas Cook India and, we estimate, more than £300m from a mooted sale of Condor, its German airline) could negate the requirement of an equity raise, but the risk remains of existing shareholder dilution.

He said there was still uncertainty about asset disposals, as there was about any takeover.

Elsewhere bid speculation also surrounded Shire, up 8p to £22.06 on renewed talk of a possible £35 a share offer for the pharmaceutical group. Traders said AstraZeneca, 15p better at 28o22.5p and Pfizer were two of a number of possible predators.

And International Power added 4.2p to 350.1p. GDF Suez owns nearly 70% and there have been repeated suggestions it might want to acquire the outstanding stake, with a price of 410p a share mentioned.

Meanwhile the prospect of an auction for Cable & Wireless Worldwide sent its shares climbing 4.1p to 31.98p. Following earlier speculation, India’s Tata Communications confirmed it was considering a cash offer for the company. Vodafone, 2.45p higher at 171.8p, has already announced it may bid for the business.

Overall the FTSE 100 finished 59.74 points better at 5931.25 as investors took the latest eurozone events – including the start of a two day EU summit which has so far not progressed Greece’s bailout at all – in their stride. There was a mixed economic picture, with the UK manufacturing survey for February coming in better than expectations, but the US equivalent missing forecasts.

Hedge fund group Man led the way, up 16.6p to 147.5p after a positive nine month trading update, while advertising group WPP rose 24p to 827.5p following an 18% increase in full year profits to just over £1bn.

But Kazakhmys closed 47p lower at £10.62, the biggest faller in the FTSE 100, after reporting flat profits of .9bn. With analysts expressing some concern about the size of its bn capital expenditure programme, the company also disappointed its followers by saying it would not complete a planned 0m share buy-back programme. So far it has bought m worth of shares, and it said:

The board is mindful of the impact of a share buy-back on the free float and trading liquidity and it is unlikely this programme will be completed.

Liam Fitzpatrick at Credit Suisse said:

While we like the outlook for copper, Kazakhmy’s capital expenditure plans are a concern. Given long dated volume growth and cost pressures we expect earnings and cash flow growth to be negative over the next three years.

A potential sale of Kazakhmys’s 26% stake in Eurasian Natural Resources Corporation is a potential catalyst and, alongside higher copper prices, presents the main upside to the shares. However, potential timing and deal structure is difficult to predict.

Numis analyst Cailey Barker was also unimpressed:

Costs remain under pressure and we now expect to see gross cash costs moving over .00 a pound. Dividend is up 28% which is positive but this is to offset the partially failed buy-back programme. We reduce our target price to £9.50, from £11, and downgrade to a reduce recommendation [from hold] on the back of the lower outlook.

Spirent Communications, which makes telecoms testing equipment, added 10.9p to 151.8p, after a 10% rise in full year profits to 3.3m. But defence group Chemring closed down 20.2p at 418.6p as the company reported continuing delays in orders from the US.

Finally loss making infrastructure business Mouchel, which is still trying to recover from damage done by government spending cuts, rose 2.5p to 15.75p as it appointed Goldman Sachs as its financial advisor. © 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