Market Report: Broker's gloom casts shadow over Unilever

As blue chips continued their march higher, Unilever was left behind yesterday after a rather damning note on the consumer goods giant from Merrill Lynch.

As blue chips continued their march higher, Unilever was left behind yesterday after a rather damning note on the consumer goods giant from Merrill Lynch. The broker is not at all optimistic about Unilever's prospects in the short term as the company prepares to unveil its full year results on 10 February.

Urging investors to sell the stock ahead of the news, Merrill argued that the maker of Persil washing powder to Magnum ice creams will struggle to hit its 3 to 5 per cent sales growth targets going forward. It believes that organic sales growth of 2 to 4 per cent is much more realistic and this of course does not bode well for Unilever shares.

Despite constant attempts by the group's management to pep up its flagging growth rate, Merrill is unconvinced that enough has been done. "The deterioration in Unilever's growth has not been fully explained by the management and until this cause has been pinpointed, they will not be able to fix it," said the broker as it slashed its earnings forecasts.

And there was a warning from Merrill to those hoping for a share buyback from Unilever in 2005. Given the company's plans to re-purchase its preference stock and its weakening profit margins, the broker fears that Unilever will struggle to generate enough cash to also support a share buyback after paying shareholders their dividend.

Unilever closed 3p weaker at 504.5p while the FTSE 100 rose 25.9 points to 4,846.7. The usual direction offered by Wall Street was absent yesterday as financial markets across the Atlantic were closed for the Martin Luther King holiday. The mining sector once again led blue chips higher as Xstrata rose 44p to 930p, Antofagasta added 49p to 1,141p, BHP Billiton improved 16.5p to 642p and Rio Tinto jumped 40p to 1,590p.

BT retreated 1.25p to 212.5p after as Credit Suisse First Boston was heard warning its clients that those expecting the telecom group to significantly increase its payout to shareholders as a result of a mooted relaxation of its debt targets will be disappointed. CSFB told investors to take profits from the recent outperformance by BT stock.

Mersey Docks fell 23.5p to 937p as the ports operator told the City that the takeover negotiations it is presently holding with a private equity player are unlike to lead to an offer of above 925p a share. Evidence of consolidation in the French retail sector sent Kesa Electricals 1.25p higher to 304.25p. The group owns the BUT and Darty electrical retail chains in France and, according to market professionals, private equity players are very likely to be running the slide rule over both businesses. Back in 2002, Kesa was reported to have had a number of offers for BUT, which is estimated to be worth £460m.

Vague bid speculation again circled Woolworths, 0.5p higher at 39.25p, and Matalan, 2.75p better at 224.75p. Similarly, whispers that ICAP may soon find itself as a takeover target pushed its stock 9p better to 294p.

However, analysts were sceptical on the ICAP front, noting that Michael Spencer, the money broker's chief executive, controls 21 per cent of the company. As a result, any deal would have to be sanctioned by him. There is, of course, the possibility that Mr Spencer might move to take the company private

Kleeneze, the once sleepy catalogue business, rose 24.5p to a fresh high of 191p as brokers the stock to be a major winner in 2005. In the short-term, the prospects for the group's internet based IWantOneofThose.com (IWOOT.com) gadget reseller and its TV shopping channel joint venture, to be launched in March, seem to be causing much of the excitement. IWOOT.com is believed to be the number one player in the market for gadgets, and already profitable, while its TV shopping business is also tipped to be seriously cash generative once up and running.

Trading New Homes debuted on AIM. The company raised £2m at 100p and saw its stock close at 105p. TNH will use the cash to buy and sell soon to be built homes. The group's business model sees it acquiring as yet unbuilt homes from developers at a discount and then selling them to the public at full price. TNH keeps the difference between to two values as profit.

Griffin Mining added 1.75p to 30.5p after strong drilling results from its China zinc mine. The project is expected to start production on time during the spring of this year. Elsewhere in the small-cap mining arena, Mano River Resources, steady at 10.75p, indicated that it had started exploration work at its diamond prospect in Liberia. Sibir Energy held steady at 177.5p despite news that Henry Cameron, its chief executive, had bought 13,800 shares at 177.75p.