Market Report: GKN draws strength from rights issue

A positive rights issue result, and some words of support from a leading broker, boosted GKN, the engineering group, which rose by 6.8 per cent last night.

Existing shareholders snapped up more than 95 per cent of the new shares issued as part of the group's cash call, with traders highlighting healthy demand for the rump, which was placed at 90p per share, compared to the closing price of 88.5p on Tuesday night. The result alone would have lifted sentiment around the stock; but GKN benefited from an additional boost, thanks to Bank of America-Merrill Lynch, which reiterated its "buy" stance on account of recent updates from others operating in the automotive sector.

Merrill said consensus estimates were underestimating the "magnitude of the earnings swing to expect in coming quarters". A "drastically lower" cost base, coupled with a turnaround in volumes following three consecutive quarters during which global car production was lower than sales, promises to strengthen GKN, the broker added, raising its 2009-11 earnings estimates for the group by an average of 20 per cent.

"At the first-half results [in early August], we expect GKN to issue a supportive outlook statement," Merrill said, helping the stock to close 6p stronger at 94.5p last night.

Overall, the FTSE 100 only just managed to register its eight consecutive session in the black, edging slightly higher to 4493.73p, up 12.56 points and within striking distance of the June peak of 4506.19. The FTSE 250 closed 51.47 points higher at 7794.05.

The mining sector came off the boil after BHP Billiton, down 1.8 per cent or 27.5p at 1502.5p, posted a production update, signalling that the restocking of commodities in China may have ended, although inventories were being built up in North America, Europe and Japan. The update, coupled with caution regarding the prospects of a general economic recovery, prompted a round of profit-taking, pressuring Kazakhmys, which fell to 740.5p, down 2.1 per cent or 16p, Lonmin, which declined to 1136p, down 3.2 per cent or 37p, and Antofagasta, which was 1 per cent or 7p weaker at 700p.

Elsewhere, in the banking sector, results from the National Australia Bank, the group behind the Clydesdale and Yorkshire banks, proved unsettling, with the group reporting a rise in UK bad debts. Sector sentiment was also hit by news of a third consecutive quarterly loss at Morgan Stanley, the American investment bank. As a result, Lloyds was 1.6 per cent or 1.14p weaker at 72.3p, while Barclays eased to 299.6p, down 3.1 per cent or 9.7p. Royal Bank of Scotland proved more resilient, relaxing by 0.11p to 39.710p.

On the downside, Land Securities, the commercial property group, was 1.4 per cent or 6.75p weaker at 481.75p after UBS weighed in, trimming its target price to 500p from 525p. "We have lowered our 2010-12 earnings numbers by between 19 per cent and 33 per cent to allow for the impact of sales and the potential impact of rising voids reflecting the worsening rental outlook," the broker said, sticking to its hold on the stock.

On the second tier, Chloride was 3.5 per cent or 5p behind at 138p as analysts weighed in on its interim management statement, which was published on Tuesday. Seymour Pierce moved the stock to "underperform" from "sell", while Charles Stanley switched its stance to "hold" from "add". Further afield, in the pubs sector, JD Wetherspoon was 1.25p lighter at 466p after Altium moved the stock to "hold" from "buy", citing the recent strength in the share price.

On the upside, Dairy Crest was 3.7 per cent or 11.5p ahead at 325p, thanks to JP Morgan, which upgraded the stock to "neutral" from "underweight", saying it was now more comfortable with the view that "improvements in liquid milk earnings [dairies] will offset downward pressure on cheese and spreads earnings".

HSBC supported DSG International, the retail group which closed 3.1 per cent or 0.75p firmer at 25.25p after the broker raised its target price for the stock to 26p from 21p, saying that while the group's UK portfolio was moving in the right direction, further downsizing was likely.

Benign broker sentiment also helped the spread betting firm IG, which rose 4.3 per cent or 11.75p to 288p, after UBS raised its target price for the stock to 325p from 275p on account of the recent positive preliminary results. Bank of America-Merrill Lynch also weighed in, raising its target price to 300p from 290p. IG is rated "buy" by both brokers.

Among smaller companies, the self-storage specialist Lok'*Store slumped to 56.5p, down just over 13 per cent or 8.5p, as the market reacted to news – revealed in a statement posted after the close on Tuesday – that it was no longer in takeover talks. In response, Investec reinstated coverage with a "buy" recommendation, saying that its net asset value based target price and forecasts remained unchanged. "We anticipate a year-end trading update shortly, but management has confirmed that the improving trend in trading in 2009 has continued, with occupancy growing strongly since the winter," the broker said.