June 19, 2008

International Ferro Metals Glistens on ‘Buy’ Note

By Nikhil Kumar


International Ferro Metals, the ferrochrome producer, was the bright spot in an otherwise dull market yesterday and claimed first place on the FTSE 250 leader board after Merrill Lynch initiated coverage with a "buy" recommendation.

The broker said the company was undervalued and set a 200p price target on the stock, which rose by 9p to 149p.

"Ferrochrome is a key ingredient in stainless steel," Merrill analyst Jason Fairclough said. "Globally, stainless demand is growing at 6 per cent per annum. Unlike nickel, ferrochrome cannot be substituted in stainless, due to its unique properties. Also, despite its higher weight than nickel in 304 stainless [the most versatile grade of stainless steel] ferrochrome cost per tonne of stainless is still just 50 per cent of nickel."

Merrill's assessment was supplemented by comments from Michael Rawlinson at Liberum Capital, who said that IFR looked cheaper than Eurasian Natural Resources Corporation, the FTSE 100-listed ferrochrome producer, which closed down 26p at 1,465p as weaker metals prices weighed on most of the mining sector.

The FTSE 100 was down 105 at 5,756.9 as investors and traders studied minutes from the last Bank of England interest rates meeting. The revelation that, while members of the Monetary Policy Committee voted 8-1 to keep the UK benchmark rate on hold at 5 per cent, an interest rate rise was discussed at the last meeting weakened sentiment on the London benchmark. Early losses on Wall Street, where earnings figures from Morgan Stanley failed to impress investors, also contributed to London's slide. The FTSE 250 lost 189.1 to 9,534.8.

On the FTSE 100, the medical equipment maker Smith & Nephew was the strongest, gaining 16.5p to 595.5p after UBS moved the stock to "buy" from "neutral". "On a 12-month view, the stock looks oversold," said analyst Martin Wales.

British Airways lost 12.25p to 225.75p after Morgan Stanley said that, with two dozen bankruptcies worldwide in the year to date and a larger number of aircraft groundings, "the [airline] industry is in greater peril than is reflected in current valuations".

"Market prices are not yet discounting $136+ per barrel of fuel into perpetuity, or are assuming double-digit annual price increases can be implemented without demand destruction," the broker said, setting a new 149p target price for BA. The broker's bull case target price is 218p, but in the bear case the figure falls to 79p.

On the FTSE 250, housebuilders were haunted by the prospect of an increase in interest rates, and by yet more adverse analyst comment. The mighty Goldman Sachs revisited the sector and said that, despite the recent de-rating in shares, "the UK housing market is only at the start of a deep downturn, which could last up to three years".

"We believe that falling profitability and cash generation should continue to place pressure on balance sheets, resulting in higher sub-sector leverage," Goldman said. "If this persists, we believe highly leveraged companies might need to raise fresh equity."

The broker highlighted Barratt Developments, which was down 10p at 80.5p, and Taylor Wimpey, which lost 5.75p to 68p, as the companies most likely to need a capital injection, which could result in significant dilution of existing shareholder stakes.

Redrow, which remains Goldman's key "sell" in the sector, had to contend with additional commentary by UBS, which lowered its target price for the stock to 169p from 208p, sending it down 29.25p to 137.75p. "Though Redrow is focusing on cash generation, an equity issue cannot be ruled out," said UBS analyst Mark Stockdale.

Mr Stockdale's colleague Gregor Kuglitsch struck Bellway, which was down 55p at 473p. While playing down the risk of an equity issue, Mr Kuglitsch said the company's "dividend policy might be at risk for 2009" and lowered the target price for the stock to 500p from 580p.

On the upside, UK Coal was buoyed by bid speculation and rose 4.5p to 556p. The rumours suggested Drax, the owner and operator of the Drax coal-fired power station, was mulling an offer for the company and took UK Coal's shares to an early intra-day high of 567p.

"You've seen ArcelorMittal go into Coal of Africa and look at Macarthur Coal, so a move by Drax for UK Coal would make sense," said one analyst.

Coal of Africa closed down 3.5p at 198.5p while Drax gained 2.5p to 759.5p.

On AIM, Faroe Petroleum touched an intra-day high of 195p after the company said an independent report had verified its current reserve and resource position. The report, compiled by Senergy Limited, was commissioned in connection with the company's new 25m credit facility with Societe Generale and prompted Daniel Stewart to reiterate its "buy" rating on the stock. Faroe rose 6p to 187p.

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