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The Times: Merrill's BP downgrade puts a brake on FTSE


By Nick Hasell

10 June 04


BP PROVED a drag on the FTSE 100 as a downgrade from its joint stockbroker left the oil major with one of the worst blue-chip performances.


Despite the setbacks last year which forced it to scale back its production forecasts, BP has been protected by the rally in the oil price to all-time highs, meaning its stock has outperformed the wider market over the last 12 months.


But in a heavyweight review of the European oil sector, Merrill Lynch suggests the shares have now run far enough. Mark Iannotti, analyst, points out that BP now trades at a 20 per cent premium to Royal Dutch Shell and France’s Total, making it the most highly-valued stock in the sector.


That is not to say the US broker does not think BP should not command a premium valuation. It believes the company is set to deliver strong growth in underlying profitability, while its bias towards exploration and production should give it greater exposure to “cylical momentum” than either Shell or Total. It also expects BP to return some €4 billion (£2.6 billion) of cash to shareholders through buybacks.


However, Mr Iannotti is concerned that BP’s capital expenditure will have to rise again before the end of the decade if it is to continue to outperform its peers in terms of growth before 2008.


With Merrill moving from buy to neutral, BP shed 11½p at 480¾p. Shell gave up 5¼p at 395p.


The wider market retreated as above-forecast manufacturing data raised the spectre of a sustained tightening of interest rates, leaving the FTSE 100 15.3 lower at 4489.5. The index was also hurt by the loss of dividends at the likes of Boots, off 20p at 650p, and BAA, down 12p at 546½p. Northern Rock added 5p at 748½p after Credit Suisse First Boston repeated its outperform recommendation and £10.10 target. Having studied the mortgage bank’s regulatory filings, the Swiss broker has found that 54 per cent of its mortgage book is now fixed-rate, compared to 40 per cent at the start of last year.


CSFB calculates that this suggests that, not only did the majority of new customers opt for fixed-rate products, but that up to one-quarter of existing customers did through remortgaging, implying a significant retention of business over the next two years.


Allied Domecq weakened 1½p at 461p, despite a positive response to presentations on its US business at an investor conference in New York on Tuesday. That briefing prompted Morgan Stanley to repeat its 500p target, suggesting that the spirit group’s shares are set to narrow their discount to Diageo, off 2p at 735½p, and Pernod Ricard of France.


The US broker was reassured that all its US operations are performing well and expects a recovery in its Mexican and Korean operations in the second half.


NEW YORK: Shares fell from month-long highs, led down by Coca-Cola, as investors absorbed gains from a three-day rally. The Dow Jones industrial average closed down 64.10 points at 10,368.40.









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