Market Report: Government axe weighs on Logica's shares

The fiscal squeeze was back on the agenda last night, with Logica failing to make any headway after a warning on the impact of public-sector cuts.

Goldman Sachs said it expected spending cuts to hit IT companies in three phases, with the sector facing the prospect of significant reductions in non-contracted or discretionary spending, a renegotiation of high margin contracts and a reduction in the size and scope of contracts in 2011-12. This bodes ill for Logica, around 13 per cent of whose revenues are exposed to the UK's public sector, according to the broker. Factoring in these risks, Goldman, whose analysts also highlighted the company's lack of progress in expanding its offshore presence, lowered its earnings estimates for 2010, 2011 and 2012 by 5, 16 and 22 per cent respectively.

"Consensus does not yet reflect these risks, in our view, and we expect estimates to track down as incremental details around the depth and nature of public sector cuts emerge," the broker said, switching its stance to "sell" from "neutral", with a revised 110p target price, compared to 145p previously. The assessment weighed on the stock, which lost 1.2p to 102.4p.

Elsewhere, Babcock International, which was under pressure after Bank of America Merrill Lynch issued a similar warning on the impact of cuts on the defence services group at the beginning of the week, continued to lose ground, closing 5 per cent or 30p behind at 567p last night.

Overall, the session began well, with the FTSE 100 rising beyond the 5,400-point mark in early afternoon trading, but the rally ran out of steam following weak US economic data. As a result, the benchmark was broadly unchanged at the close, ending 14.55 points higher at 5,365.67, while the mid-cap FTSE 250 index fell back by 31.69 points to 10,106.43.

The banks led the way on the blue-chip index, partly owing to reassuring results from continental peers UBS and Deutsche Bank, and partly because of a European decision on capital rules. The Basel Committee on Banking Supervision, which has been busy formulating new norms to prevent a repeat of the financial crisis, relaxed some of its proposals on capital and liquidity requirements, boosting the mood across the sector.

Lloyds was the strongest of the lot, rallying by nearly 9 per cent or 5.8p to 71.8p, while Royal Bank of Scotland rose by 3.68p to 50.35p – leaving the taxpayer with a slight profit. Barclays was up 23.9p to 339.55p. Besides lifting the banks, the news also cheered other financial stocks, including Prudential, which rose nearly 5 per cent or 25p to 552.5p.

On the downside, Intercontinental Hotels was the biggest faller on the FTSE 100, shedding 7.4 per cent or 89p to 1,110p as traders highlighted a placing of 29.9 million shares, with Barclays Capital said to be offloading the stock on behalf of the billionaire Barclay brothers. A Stock Exchange announcement confirmed the move, with the disclosure that the Barclays' Ellerman Corporation investment vehicle had disposed of its 10 per cent stake in the hospitality group.

The mining sector tracked the market, rising in early trading but losing ground amid worries about the world economy in the latter part of the session. Kazakhmys, for example, went from an intra-day high of 1,236p, up nearly 3 per cent, to 1,216p, up 13p, at the close. Rio Tinto was similarly unsettled, going from a session high of 3,439.5p, up 89.5p, to 3,355.5p, up 5.5p, at the end of the day.

Further afield, the pubs group Greene King was slightly lower, ending at 446.2p, down 2.9p, despite Goldman repeating its "buy" view, albeit with a revised 540p target price, compared to 570p previously. In the wider pubs sector, the broker was more cautious on Marston's, which was 2.55p lower at 98.45p as Goldman reiterated its "conviction sell" view. Numis was more positive, repeating its "buy" recommendation and raising its target of the stock to 125p from 120p.

Dana Petroleum rose by 17p to 1,707p as traders awaited further news on the Korea National Oil Corp's bid proposal. Referencing Dana's response to KNOC's indicative offer of 1,800p per share at the end of last week – the FTSE 250-listed oil prospector raised various issues, including the financing of the offer – Citigroup said it was concerned by what it characterised as "material friction between Dana & KNOC on both valuation & the terms under which a deal could potentially materialise".

"We believe these issues are surmountable, but think the likelihood of a formal offer is only 50-50," the broker added, upping its target to 1,655p, but lowering its rating to "hold".

Altium failed to lift the mood around Sportingbet, the online gaming group, which lost 0.25p to 56p despite the broker urging investors to make the most of the recent pullback in the shares. Altium said the underperformance was at odds with the positive message in the company's third-quarter results and its June investor presentation, adding: "Furthermore, the football World Cup should have resulted in a boosting of revenues in what is traditionally a quiet fourth quarter, with positive trading comments from the broader sports betting industry."