Market Report: Whitbread rises as bear changes heart

Broker support boosted Whitbread as the FTSE 100, buoyed by some good news in the banking sector, firmed up to close at a 21-month high last night.

The owner of the Premier Inn hotel chain saw its shares rise by 21p to 1,540p after Société Générale, one of the last bears when it comes to the hospitality group, turned bullish after a recent meeting with management. The broker abandoned its "sell" view, conceding that Whitbread had "weathered the crisis surprisingly well", managing to hold on to average room rates at Premier Inn, while at the same time extending the reach of the Costa coffee shop chain, with the "pace of expansion largely offsetting the expected decline in unit revenues".

"When the cycle turned, we were worried that Premier Inn would lower its prices given that many of its competitors were offering discounts. Prices were not cut, however, except for some highly effective promotional campaigns designed to support weekend occupancy rates," the broker explained, adopting a "buy" view. "For the current year, we now forecast a small 1 per cent increase in Revpar [revenue per available room] at Premier Inn versus a 3 per cent decline previously, while we retain our estimate of a 3 per cent decline for the rest of the market in 2010."

Overall, the FTSE 100 almost breached the 5,700-mark, touching a session high of 5,691.22 before relaxing to 5,650.13, up 7.51 points, as the expiry of various futures and options offset the impact of some positive earnings news in the banking sector. The FTSE 250 was also firm last night, closing at 10,019.77, up 15.59 points, after touching a high of 10,083.34 earlier in the session. Sentiment received a boost after Lloyds Banking Group, up more than 8 per cent, or 4.58p, at 60.13p, said it was on track to turn a profit this year. The news powered the likes of Royal Bank of Scotland, which was 2p higher 44p, and Barclays, which rose to 357.6p, up 4.7p, with analysts at Execution Noble flagging the prospect of a pre-election sell down of the Government's stake in Lloyds.

Seymour Pierce analyst Bruce Packard remained cautious, however. "In general, banks have been very bullish in client meetings post their results," he said, repeating his "sell" view on Lloyds. "Given that interest rates are at a 350-year low, it is not surprising that credit quality is improving. But UK households are around 3 times more indebted than during the early 1990s recession, and consensus forecasts for growth look far too optimistic compared to how the banks grew coming out of the last recession."

In the wider banking sector, HSBC and Standard Chartered were held back, relaxing by 1p to 680p and by 1p to 1,770.5p, with the latter coming under pressure after Goldman Sachs, highlighting the recent run of strength and headwinds to earnings, abandoned its "buy" stance. "Recent operational trends are strong and we are optimistic on the long-term outlook for Standard Chartered, but we believe that it will prove challenging for the group to deliver medium-term earnings growth," the broker said, adopting a "neutral" view.

In the mining sector, commodity issues were under pressure as options expired. There was also some caution following news from India, where central banking authorities moved to raise interest rates for the first time since 2008, reminding traders of the threat of tightening elsewhere in the world, particularly China. Vedanta Resources was among the hardest hit, falling 84p to 2,622p, while the precious metals producer Randgold Resources lost 127p to 4,810p. The Eurasian Natural Resources Corporation, which touched a session high of 1,214.06p, was also down at the close, shedding 3p to 1,160p, while Xstrata lost 27p to 1,143p.

Defensives were out of favour, with the power plant operator Drax losing 7.2p to 363.3p, as bid rumours, which began fading on Thursday, were replaced by a rush into riskier financial plays. British Gas-owner Centrica, down 7.1p at 290.9p, and National Grid, down 9p at 640p, also fell back, along with Pennon, which slipped to 523p, down 3.5p, and Severn Trent, which was marked down by 9p to 1,206p.

Further afield, the funeral homes firm Dignity was 1.6p stronger at 196.2p after Panmure Gordon, weighing on the back of the recent full-year results, reiterated its "buy" recommendation. "We maintained our headline forecasts and believe our assumptions look well underpinned given the strength and predictability of its business," the broker said, keeping its target price for the stock unchanged at 872p. "We would hope the possibility of acquisitions will increase throughout the year, although this remains unpredictable in nature."

Also on the upside, the stockbroker Collins Stewart rose by 3.5p to 79p as speculators moved in on sector consolidation hopes. There was broad agreement on the prospect for deal activity in what is widely viewed as a fragmented sector, but little consensus on who might be the first to jump on the bandwagon. Evolution, down 1.4p at 120.6p, was mentioned as a potential bidder, though traders remained uncertain.