Market Report: UBS calls time on overvalued Unilever shares

UBS called time yesterday on the recent rally by Unilever and left shares in the consumer goods giant as one of the worst performers in the FTSE 100, down 13p to 536.5p. In the last month alone, Unilever has risen 11 per cent following strong first-quarter results and a slow move by investors into more defensive sectors. But UBS says this has left the group's stock looking overvalued and urged its clients to reduce their exposure to the company.

UBS called time yesterday on the recent rally by Unilever and left shares in the consumer goods giant as one of the worst performers in the FTSE 100, down 13p to 536.5p. In the last month alone, Unilever has risen 11 per cent following strong first-quarter results and a slow move by investors into more defensive sectors. But UBS says this has left the group's stock looking overvalued and urged its clients to reduce their exposure to the company.

UBS said: "We believe the market has overreacted, particularly to the slightly better-than-expected first-quarter results." It warns that Unilever's portfolio of products leaves it especially exposed to the deteriorating economic environment in Europe and the changing landscape of the industry in which it operates. According to the Swiss broker, Unilever is likely to face a growing competitive threat as a result of the merger between Proctor & Gamble and Gillette.

Unilever shares hit a nadir of 443p in October after a profits warning but have rallied strongly since to touch a high of 553p in the middle of last month. UBS sees the stock as worth little over 490p.

Elsewhere, there was talk that Rentokil Intial, down 6.25p to 147.75p, might be tempted to launch a bid for its smaller rival PHS, up 2p to 97.5p. PHS has confirmed receiving a takeover approach which is believed to have come from JP Morgan Partners, the private equity firm. A move on the company would cost Rentokil up to £500m but Dresdner Kleinwort Wasserstein is not convinced by the story. The broker said: "We would find Rentokil doing a large deal a surprise given all divisions within its portfolio are deteriorating."

DKW also downgraded its earnings forecast on Rentokil by 6 per cent. It warned that the company continues to suffer from pricing pressures and increasingly sophisticated competition. The German broker therefore urged investors to exit Rentokil stock fast.

For a second session in a row the FTSE 100 teetered on the brink of crossing the psychologically important 5,000 level before pulling back at the close. It finished 22 points lower at 4,964.0. Meanwhile, the FTSE 250 made progress, gaining 8 points to 7,114.

Egg, 8.5p higher to 110.5p, was again on bid alert as rumours circled dealing rooms that Prudential, off 4p to 488.5p, is looking at ways to realise the value of its 79 per cent shareholding in the internet bank. Analysts estimated that the insurer could raise up to £600m if it were to find a buyer for Egg. It could use this cash to help finance its future growth.

Lonmin added 28p to 1,026p as UBS raised its rating on the miner to "buy" from "neutral". The broker expects the company to benefit from strong metals prices over the coming years and so raised its earnings forecast for 2005 by 20 per cent and for 2006 by 27 per cent. UBS is particularly bullish about platinum prices, which are key to Lonmin. It predicts that Chinese demand will lead to a recovery in the price of the commodity.

Pursuit Dynamics added 7p to 215p amid suggestions that the company will soon be able to announce a deal showing that its revolutionary technology can be used in the fire-safety arena as well as a component for the beverages industry. Majestic Wine put on 10p to 260p on vague whispers of stake building in the wine retailer.

Applied Optical Technologies, 2.5p strong at 30p, was boosted by a series of director share purchases. Leading the way was its chairman, David Mahony, who picked up 50,000 shares at 27.5p. Meanwhile, Mark Turnage, the group's chief executive, and Michael Angus, its finance director, each bought a more modest 10,000 at the same price. Celsis International gave up 0.25p to 36p after Sir Christopher Evans, a non-executive at the biotech, announced plans to dispose of 3 million shares at 36p. The stock will be placed with institutional investors.

Dwyka Diamonds added 1.25p to 36p after signing a production deal with De Beers which will earn the company more than $1m (£550,000) of profit in the first year of the deal's existence. Hunting firmed 4p to 234p on talk of strong trading at the oil services group. Word has it margins are running at a record level. 2ergo ticked 2.5p higher to 140p on whispers that the mobile solutions group may soon have some positive news about its roll-out in the US.

Finally, RAB Special Situations had its first day of dealings on AIM. The group, set up to allow ordinary punters to invest in RAB Capital's special situations fund, raised £40m at 100p and saw its stock close at 101.5p. Some were disappointed by the float as it had originally been hoped the company would be able to raise up to £100m.