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 Concern over Pensions

By: Adam Plowright and Peter John

 Financial Times, August 16, 2002

Shares in aerospace and defense companies were weaker after Merrill Lynch singled out the industry leaders as having been badly hit by the fall in global equity markets. Many of them now face large pension liabilities, the broker said.

Rolls-Royce, which has been under pressure from concerns over some of its accounting methods associated with the long-term development of its engines, has been one of the more high-profile pension worries for investors. Yesterday's note from Charles Armitage, Merrill analyst, elucidated the magnitude of the problem. The shares closed 1? lower at 130?p.

The company "is likely to be the worst affected", it said, with the pension fund hole estimated to be ý406m worse than at the year-end. The total amount of ý1.02bn represented 28 per cent of the Enterprise Value, Merrill said. It added: "The size of the pension fund compared with the market capitalization will also mean the stock price will tend to be more volatile."

BAE Systems fell 8? to 291?p after its net liability was revealed to be ý1.45bn at current equity market levels and Meggitt, another aerospace supplier, fell 5? to 177p. Its deficit totals an estimated ý50m.

The exception was Smiths Group, which has overfunded its pension fund in the past. However, analysts said the company had seen its surplus "almost disappear" to about ý16m. The shares closed 6 lower at 715p.

The whole industry has also been hit by news of a "75 per cent risk of a strike at Boeing", according to Credit Suisse First Boston. Labour negotiations begin in September, which, if they result in collective action against the company, could cause "enormous damage to second-half delivery schedules for UK aerospace suppliers", said CSFB.

SABMiller fell in early trading as investors reacted to research by SG Securities that downgraded the company to "underperform" from "hold". By the afternoon, shares had been caught in the tide of positive sentiment and lifted 4 above to 459p.

Analyst James Williamson said he was not prepared to "give the company the benefit of the doubt" over fears for the financial health of its holding company.

CI Traders flat

CI Traders ended its first day trading as an AIM-listed stock flat at 83p. The company is born of a merger between the largest brewing company and food retailer in the Channel Islands - Ann Street and Le Riche.

The deal was a cost-saving initiative, said Russell Wynn of Collins Stewart, which has been appointed broker and adviser to the deal. Both companies have overlaps on distribution, he said.

Forecasts for diversified mining group Anglo American were trimmed by Merrill Lynch and the shares fell 2 to 785p.

Recent results for their platinum, gold and diamonds businesses have been below expectations, said the broker, even though it maintained its "strong buy" recommendation.

In a note on the construction and building material sector, Wolseley was upgraded by JP Morgan and shares rose 11? to 570?p. The investment bank said it expected it to outperform "significantly on a three-month timescale".

Analyst Robert Crimes said he expected the plumbing distribution company, with high exposure to the housing market in the US, "to benefit [in the short-term] from continued low interest rates". He also cited the company's strong market position as the dominant company in the sector.

Hanson rose 13 to 407p, despite a downgrade to "market performer" from "buy" as a result of concerns about asbestos liabilities in the US. On a good day for the sector, BPB, one of the world's largest plasterboard manufacturers, ended 23 stronger at 298p. Travis Perkins closed 25 higher at ý10.19p.

Standard Chartered improved 31 to 751p. Morgan Stanley upgraded the emerging markets bank to "overweight" from "equal-weight" after its interim results last week. The broker said last week's first-half results constituted the first evidence that Standard Chartered was making headway, with revenues rising in double-digits, costs falling and credit quality improving.

Morgan Stanley raised its 2002 earnings per share forecast to 73 cents from 62, and its 2003 estimates to 88 cents from 81.

British Land, the property development company, finished 5? lower at 512p.

Sinking feeling for P&O

P&O disclosed the group's trading figures for the second quarter, which prompted a 16? share price fall to 219p. The catalyst was a profits warning from its 50 per cent-owned container shipping business, P&O Nedlloyd.

The company said it faced a "more difficult trading outlook than previously expected" for container shipping operations. Merrill Lynch issued a note with "reduce/ sell" advice.

House broker WestLB Panmure cut its 2002 profit forecast from ý74m to ý46m. Nevertheless, it expects P&O to maintain its full-year dividend and repeated its "buy" stance and 285p price target.

British Energy recovered slightly from the recent heavy falls following reassurance by the company that it would be able to meet all of its cash commitments.

Fears over the company's finances were sparked by Monday's announcement that its Torness reactor in Scotland had been closed as a result of concerns over the safety of a gas circulator.

That had left the company short of both Unit 1 and Unit 2, which was closed down in similar circumstances in May, at a time when its station at Dungeness in Kent is closed for statutory outage and its coal-fired station in Eggborough, North Yorkshire, was partly unavailable. The shares ended the session a penny stronger at 60p.

Invensys was restrained after Credit Suisse First Boston cut its target price and downgraded its sales estimates. It expected sales at Invensys to fall by 1.2 per cent in 2003 and rise by 3.1 per cent in 2004. The shares closed a penny firmer at 65p.

Fears of a rights issue at Morgan Crucible, coupled with earnings downgrades at the carbon and technical ceramics group, saw the company's shares fall another 6 to 68?p.

Merrill Lynch trimmed its estimates for 2002 and 2003 on the grounds that a substantial cyclical recovery would take longer than expected.

Sage rallied 12? to 127p after its recent falls, as overnight results from its rival Intuit of the US provided reassurance on IT spending and prompted Schroder Salomon Smith Barney and Dresdner Kleinwort to repeat their bullish stance.

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