Market Report: BHP and Rio are good buys 'alone or together'

BHP Billiton and Rio Tinto got a shot in the arm from Sanford Bernstein yesterday. The broker said that the two companies were compelling "alone or together," adding: "We believe the best strategy is to own both BHP Billiton and Rio Tinto to reduce risks of potential changes to their proposed merger... Beyond [the current] bid period, we see a benefit in owning either stock if the transaction concludes.

"Both companies are likely to benefit from their respective commodity exposures. While BHP Billiton will be gaining some immediate benefit from high oil prices, we see Rio Tinto's relatively high aluminium exposure (17 per cent of 2008 Ebitda) as a strength," the broker concluded.

The positive assessment was accompanied with an upgrade for each to outperform from market-perform. As a result, Rio Tinto rose by 252p to 5,694p, while BHP Billiton added 57p to 1,617p.

Bernstein also upgraded Xstrata, to market-perform from under-perform. The Anglo-Swiss miner gained 127p to 3,707p.

House-builders, on the other hand, were weak after analysts at Cazenove said the recent share price bounce in the sector was "unjustified" and did not reflect underlying market conditions. The downbeat assessment took Persimmon to 719p, down by 2.97 per cent or 22p. The company ended the day at second place on the FTSE 100 loser board. Bovis Homes lost 34p to 590p, while Bellway was weaker by 47p at 843p. Other house-builders, including Taylor Wimpey, which shed 4.25p to 181.75p, Redrow, which was down by 12.50p to 312.25p, and Barratt Developments, which lost 20.75p to 401.50p, were also off-colour.

Overall, the FTSE 100 was up 55.80 points to 5,947.10. The London benchmark was kept firm by bid talk around British Energy. A report in the French newspaper La Tribune suggested that EDF was about to make an offer for the British company, sending its shares up by 48.50p to 711p, to first place on the FTSE 100 leader board.

The speculation helped the benchmark to survive the effects of some disappointing US economic data. The Labour Department said that the US economy shed 80,000 non-farm jobs in March, the third consecutive month of contraction in the labour market. The decline was worse than many in the market expected and the sharpest in five years, reinforcing the view that a US recession was well under way.

The FTSE 250 was down, shedding 12.10 points to 10,165.10.

On the FTSE 100, pharmaceutical stocks showed some strength yesterday. GlaxoSmithKline was up 14p to 1,135p after the US Food and Drug Administration approved its Rotarix rotavirus infant vaccine.

Sector peer AstraZeneca was also up, gaining 60p to 2,110p after Morgan Stanley upgraded its target price for the stock to 2,200p from 2,150p. This was the second broker upgrade for the company this week. On Tuesday, Citigroup revised its rating for the stock to "buy" from "hold".

On the FTSE 250, Close Brothers climbed to third place on the leader board after analysts at Landsbanki initiated coverage on the stock with a "buy" recommendation. "After poor share price performance over five years, Close recently dashed hopes of a bid," said the Landsbanki analyst Ian Poulter. "However, with market forecasts for Close incorporating a pessimistic outlook, we believe the shares will show outperformance as the group utilises its surplus capital to better effect. It has room for accelerated growth and could still consider further capital returns," he added. By the end of the day, Close Brothers was up 33p at 674p.

FKI was weak yesterday as the market awaited a formal bid from Melrose, the engineering conglomerate which has been studying the firm's books. Rumours that a bid was due early next week failed to excite investors – the company has been a recurrent feature in market speculation over the past week. FKI closed down 0.25p at 71.25p.

Among smaller companies, SCI Entertainment gained 20.40 per cent or 10.25p to 60.50p on the back of bid rumours. The speculation suggested that the company, which owns the video games publisher Eidos, was about to be subject to a 100p per share offer. On market source suggested that the suitor may be a larger American peer.

The semiconductor maker Zetex soared by 88.51 per cent or 38.50p to 82p after US peer Diodes made a recommended 85.45p per share offer for the company. The offer represents a 96 per cent premium on Zetex's closing price on Thursday, valuing it at £89.1m.

On AIM, Hichens, Harrison & Co, London's oldest stockbroker, was up 6p at 275p after reaching agreement over a takeover offer. The £55m deal will see Hichens, founded in 1803, pass into the hands of India's Religare Capital Markets.