Market Report: Merrill warns Invensys may need fresh rights

Invensys is under significant financial strain and may soon require a fresh injection of cash via a rights issue. That was the conclusion of an investment note from Merrill Lynch yesterday, which urged investors to sell the stock fast and set a price target of just 12p. Invensys shares fell 7 per cent in response, giving up 1p to 14.25p.

Invensys is under significant financial strain and may soon require a fresh injection of cash via a rights issue. That was the conclusion of an investment note from Merrill Lynch yesterday, which urged investors to sell the stock fast and set a price target of just 12p. Invensys shares fell 7 per cent in response, giving up 1p to 14.25p.

The engineering conglomerate's main problem is its massive debt burden, according to the US broker. Merrill estimates that total group debt stands at £1bn, and it fears that Invensys is unlikely to generate sufficient cash to pay this down for a long while.

"Ultimately, we believe that Invensys needs a further substantial injection of equity, at least £500m, to help stabilise its financial performance," the broker said, as it hinted that the company might otherwise require a debt-for-equity swap. Such a move would wipe out a sizeable chunk of shareholder value and would be very bad news for the likes of Brandes, the US fund manager, which has steadily built up a 17 per cent holding.

Given its distressed state, Invensys has been tipped on many occasions as a takeover target. However, Merrill believes such a scenario is unlikely to ever happen given the group's conglomerate structure and pension fund liabilities, which will be viewed as a "poison pill" by any buyer.

Meanwhile, in the FTSE 100, Legal & General dropped 2.25p to 101.5p as Deutsche Bank cut its rating on the insurer to "hold" from "buy". L&G shares have risen by 11 per cent since mid-July and the German broker believes that the stock has got ahead of itself. It advised investors to switch into rival Aviva, off 0.5p to 550.5p, noting that the underperformance in recent months has left the company with an excessively low valuation.

Cairn Energy's promotion to the blue chip index was official confirmed by FTSE and the oil explorer celebrated with a 38p rise to 1,488p. Also driving the stock higher was news that Norman Murray, the group's chairman, had bought £290,000 worth of shares at 1,443p. Marks & Spencer fell 1.25p to 354.75p as Panmure suggested that City forecasts for earnings at the retailer are far too optimistic. It argued that downgrades may soon be required, as M&S comes up against tough competition, and therefore advised its clients to sell their holdings in the group.

Elsewhere, dealers were surprised to see Bovis Homes rise 20p to 591p. Shares in the wider sector were largely flat or lower. Bellway lost 8p to 774p, Berkeley Group was unchanged at 1,225p, Crest Nicholson put on 0.5p to 369p and Redrow added 1p to 372p. Bovis's out performance set tongues wagging about a possible bid for the group. Analysts have long viewed the company as an acquisition target for one of the sector's larger players.

Chemring lost 6p to 382.5p as it emerged that the UAL consortium, of which Chemring is a part, has failed to progress to the next stage in the bidding for the US government's civil airline defence project. Evolution Beeson Gregory complained that only a few weeks ago the group's management team were confidently predicting that they would be going through to the second phase. Chemring is believed to have blamed the failure on the weaknesses of other members of the UAL consortium, but Evolution was not impressed and said that this offered little comfort to investors.

The broker noted that this is the third time since March that the company has failed to live up to the expectations created by its management. Following the latest setback at the group, Evolution downgraded its earnings forecasts and urged investors to reduce their holdings in the stock, which it believes has now gone ex-growth.

SIG improved 7p to 420p after posting a 30 per cent rise in interim profits. The company is benefiting from increased demand for its insulation materials as a results of new government building regulations which aim to reduce energy waste. SIG closed within a whisker of its 423.5p all-time high. Helphire gained 2.5p to 223.5p in response to a positive AGM trading statement from the accident recovery specialist. Holding the shares back from further gains were worries that the company is likely to come up against growing competition from rivals.

Gyrus improved 5.5p to 226.5p on talk that sales of the group's PlasmaKinetic surgical product are booming. Bulls reckon sales are running about 20 per cent ahead of management expectations. Spice Holdings improved 5p to 132.5p on whispers that the group, which manages facilities for utility companies, is close to winning two contracts in the north of England.

Finally, Gulf Keystone Petroleum had an impressive debut session on AIM. Shares in the oil explorer listed at 48p and finished the day at an impressive 56p, valuing the company at £140m. Gulf Keystone has assets in Nigeria and Algeria. Brokers were yesterday heard talking of a possible upgrade by the company of forecasts for its Algerian fields.

MARKET MOVERS

Benfield 252.5p (up 12.5p, 5.2 per cent). Unveils plans to buy back £40m worth of shares over the next 18 months and posts a 113 per cent rise in interim profits.

DS Smith 153.75p (up 7.5p, 5.2 per cent). Competition Commission provisionally clears the group's acquisition of Linpac Containers.

Woolworths 44p (up 1.25p, 2.9 per cent). First-half losses narrow and the retailer predicts that it is going to have a great Christmas.

Somerfield 139p (up 3.75p, 2.8 per cent). The retailer's trading statement proves to be not as bad as some in the City had feared.

Oriel Resources 62p (up 15p, 31.9 per cent). Issues a bullish feasibility study on its nickel project in Kazakhstan.

Comino Group 230p (up 45p, 24.3 per cent). Announces that it has received a bid approach.

Aquilo 2p (up 0.25p, 14.3 per cent). The company boasts that it will be profitable by the end of the year.

Alumasc 164.5p (up 19.5p, 13.5 per cent). Underlying profits rise by 8 per cent to £8m for the year.

Mersey Docks 733p (up 23p, 3.2 per cent). Dresdner Kleinwort Wasserstein upgrades to "hold" from "sell".

British Airways 228.75p (down 7.25p, 3.1 per cent). Investors worry that the airline may be considering a bid for Iberia after raising £425m from the sale of its stake in Qantas.

Amvescap 309p (down 7.25p, 2.3 per cent). The details of the fund manager's settlement with America's SEC disappoint investors.

T&F Informa 367p (down 13p, 3.4 per cent). Profit taking after solid interim results.

Victoria 210p (down 21p, 9.1 per cent). Investors continue to exit the stock after Tuesday's profit warning.

IP2IPO 600p (down 8.5p, 1.4 per cent). Profit taking as interims see the group break into the black.

Devro 107.5p (down 6p, 5.3 per cent). Company talks of strong trading but complains of negative exchange rate pressures.