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UK Equities
Oil service sector sell-off hits Amec
From the Financial Times of Tue, 09 Dec 2014 19:01:55 GMT
An employee of a petrol pump fills a car in New Delhi©AFP

Less than a month since Amec bought Foster Wheeler, investors have already written off the deal.

Amec shares hit a three-year low on Tuesday, which dragged the engineer’s market value below its level in January when the $3.3bn cash-and-stock acquisition was announced. The sell-off among oil services companies since late November has sent Amec tumbling 23 per cent, while completion of the Foster Wheeler deal grew its share count by 29 per cent.

Société Générale blamed investor ignorance for the sell-off. Foster Wheeler is little known in the UK and was under-researched when US listed, meaning forecasts for earnings, one-off costs and asbestos liabilities are probably not reliable, said the broker. It also highlighted that the market’s 2014 consensus earnings forecast still needs to reset to the level provided on Amec’s own website.

What investors have missed, SocGen argued, is that Amec is now “the most defensive play in the sector” thanks to its declining reliance on upstream capital expenditure and its sustainable 4.9 per cent dividend. Add in cost savings and tax benefits from Foster Wheeler’s “structurally lossmaking” US business and, for anyone prepared to look beyond Amec’s annual results in March, the shares can regain their blue-chip status and re-rate back above £10, SocGen said.

Amec closed at 855.5p, down 0.9 per cent.

A wider market sell-off gave the FTSE 100 its sharpest daily fall in nearly two months. The index was down 2.1 per cent or 142.68 at 6,529.47.

Tesco’s fourth profit warning of the year meant Wm Morrison lost 4.4 per cent to 176.7p and J Sainsbury was 1.8 per cent weaker at 231.6p.

“Tesco has many ways to free up cash to invest in the UK proposition,” said Merrill Lynch. “A prolonged price war therefore looks likely to us.”

A slump on the Athens stock market carried over to Coca-Cola HBC, which slid 5.3 per cent to £13.29. The bottler transferred its main listing to London last year, having previously accounted for 30 per cent of the Greek index.

Shire slid 5.2 per cent to £43.25 after Merrill cut the drugmaker off its “buy” list. The broker also moved to a negative rating on GlaxoSmithKline, down 3.5 per cent to £14.09.

With the European pharmaceuticals sector trading at more than 16 times 2016 earnings, “pipelines are no longer a free option and catalysts are now needed to drive upside”, said Merrill. Higher valuations and more stretched balance sheets also mean M&A will be less of a theme in 2015, the broker said.

Testing group Intertek, down 6 per cent to £21.76, led the business services sector lower on a downgrade from Credit Suisse. Citing Intertek’s exposure to oil and gas infrastructure spending, the broker preferred G4S, up 2.1 per cent to 279.8p.

Vodafone slipped 2.8 per cent to 223.6p amid worries about its business in India, where new entrant Reliance Jio plans to make an aggressive play for high-end subscribers. India is expected to account for nearly half of Vodafone’s service revenue growth over the next three years, said Merrill.



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