Market Report: Cazenove dents ICI with ultra-bearish note

When Cazenove speaks investors tend to listen attentively. And so it proved yesterday, when the heavyweight stockbroker issued an ultra-bearish note on ICI, sending shares in the chemicals giant 4p lower to 211.5p. "Sell" was its conclusion but not before Cazenove had laid out some very good reasons for this recommendation.

When Cazenove speaks investors tend to listen attentively. And so it proved yesterday, when the heavyweight stockbroker issued an ultra-bearish note on ICI, sending shares in the chemicals giant 4p lower to 211.5p. "Sell" was its conclusion but not before Cazenove had laid out some very good reasons for this recommendation.

The broker worries about both ICI's weak balance sheet and the outlook for trading at the group. It notes that even after the company's 2002 rights issue it still carries a hefty debt burden. Borrowings at the group stand at around £3bn, leaving ICI with gearing of 115 per cent. Cazenove does not expect this level of debt to decline materially before 2007. Meanwhile, it predicts that cashflow will be constrained by legacy transformation and pension costs for even longer, possibly absorbing as much as £1.4bn of cash by 2012.

On the issue of ICI's trading outlook, Cazenove was also downbeat. It forecast a problematic performance at all of the chemical group's core units apart from its paints division. "We are concerned that structural changes in the industry, combined with reduced pricing power and rising raw material costs, will mean that ICI will not see its profit margins return to 2000 levels," warned the broker. The main structural changes which are likely to work against ICI are increased competition in Asia and consolidation among its customers, who will inevitably want to squeeze ICI on its prices.

In the media sector, WPP dropped 8p to 522p on fears that the group may be tempted to bid for Grey Global, the US advertising agency. Publicis, WPP's French rival, has said it is not interested in Grey Global and investors yesterday fretted that WPP may now make a move on it. Such an acquisition could cost it up to $1.5bn and Merrill Lynch worries that this would leave the group's balance sheet looking rather stretched.

After a poor start to trading, the FTSE 100 index rallied thanks to a strong performance by stocks across the Atlantic and closed 14.9 points better at 4,372.6. Disappointing second quarter sales figures from Intel weighed on the technology sector. CSR dropped 18p to 391p, Ceva fell 20p to 405p, Wolfson Micro gave up 9p to 261p and Imagination Technologies retreated 4.5p to 74p.

ITV fell 0.75p to 109p despite talk that the broadcaster has started to explore exit routes for several of its non-core businesses. Investec Securities believes disposals could raise as much as £542m for ITV, which will strengthen the group's balance sheet and possibly leave room for a return of cash to shareholders. The broker tips the news of disposals to start feeding through over the next few months and argued that this will drive ITV shares higher.

Lower down the pecking order, PHS dropped 2.75p to 75p following the sale of 800,000 shares at 78p by Peter Cohen the chief executive. PHS is often described as a mini-Rentokil Initial, specialising in washroom services and products. Rentokil had a massive profit warning in May, and since then many in the market have worried that PHS may not be immune to the rising competition in the sector.

Morse dropped 4p to 107.5p as the stock was downgraded to "hold" from "buy" at Panmure Gordon. The move follows Morse's £50m bid for rival Diagonal on Monday. Panmure said it was not convinced by the merits of the deal, describing Diagonal as an ailing business and one which has little strategic fit with Morse. The broker calculates that the offer values Diagonal at a pricey 33 times next year's earnings.

Pentagon Protection put on 1p to 5.75p in response to a series of director share purchases. David Thomas, the chairman, bought 200,000 shares at 5.5p, as did Graham Bannerman, the chief executive, while Ronald Bambra, a non-executive, picked up a more modest 100,000 at the same price. Rensburg fell 7.5p to 452.5p amid concerns that the recent weakness of stock markets on both sides of the Atlantic have hit the performance of the asset manager's various funds.

There was news of a plethora of new issues. The biggest was oil production group Nelson Resources, which operates in Kazakhstan, and Blueheath, the convenience store grocery wholesaler. Nelson Resources raised £64m at 57.25p while Blueheath raised a more modest £18.5m at 121p. Shares in both will start trading on AIM next week. Meanwhile, there was a debut on AIM from internet services provider PlusNet. Broker Robert W. Baird raised £12.5m for the group at 90p. The stock closed at 94p.

There will be further new issues today. BetonSport is expected to list and raise an impressive £55m. The online gaming group made a profit of £14m last year and is tipped to top the £17m level next time around. Its issue is known to be over subscribed. On a smaller scale, Silvermines Media will also make its market debut today.