Brokers flatten frothy S&N

The froth was knocked off Scottish & Newcastle's share price yesterday after a pair of leading brokers called time on the recent advance of the brewing group that embraces Kronenbourg and John Smiths.

Over the past month S&N shares have risen 14% and on Monday they came within a penny of a year's high of 402p. That performance has been driven by the heatwave in western Europe - S&N's main market - and income funds buying ahead of the payment of a 20p final dividend.

Cazenove and Dutch broker ABN Amro reckon that rally has lifted S&N to a price that is unsustainable, and advise that shareholders should take profits.

"Following recent share price strength, S&N's rating for 2004 is at least in line with its peers. In our view it should trade at a discount because of issues surrounding the dividend, its lack of earnings growth and because of its significant exposure to low growth markets," ABN analyst Jamie Norman said as he cut his rating to reduce from hold and set a 365p target price.

Cazenove, which reiterated its sell recommendation on the stock, reckons that once the shares start trading ex-dividend this morning the income fund buying will dry up. This is because tomorrow's pay-out will be the last before S&N demerges its pubs division. Thereafter the dividend will be rebased, and will be 40% lower.

That view was echoed by Mr Norman: "A new yield of 5.4% may not continue to attract income funds when it is realised that dividend cover falls to 1.45 by 2005 and that one third of cashflow goes toward the dividend, compared with 10% with Heineken and Interbrew."

In the wider market, the FTSE 100 closed higher for a fourth straight session but failed to hold the 4,200 level, punctured early in the session. Underpinned by a strong showing from heavyweight drug stock GlaxoSmithKline, up 17p at £12.11 on positive comments from investment banks UBS and Citigroup, the blue chip index closed 8.9 points higher at 4,185.6.

Market turnover reached just 2bn shares as investors refused to take positions ahead of the US Federal Reserve's interest rate decision.

The FTSE 250 gained 19.8 points to 5,365.3, while the FTSE Small Cap index rose 13.5 to 2,304.6. In the bond market, gilts ended a fraction lower ahead of the Fed's decision. By the close, the yield on the 10-year gilt stood at 4.448%.

Rexam, the world's biggest maker of drinks cans, was the day's top blue chip performer. Its shares rose 16p to 431p on the back of rumours that Australian rival Amcor might be stalking the company. However, analysts reckoned the rise had more to do with the fact that Rexam will benefit from the heatwave.

Dixons - up 3p to 131p - was also in demand, helped by the latest report from the British Retail Consortium showing sales of PCs and digital cameras rose in July and that demand for electrical fans and fridges was strong.

Countrywide Assured, Britain's largest estate agency chain, was among the top FTSE 250 performers, advancing 8.5p to 121p after Numis Securities advised clients to buy ahead of tomorrow's interim results.

"We believe that the probability for an earnings surprise on the upside is high," Numis analyst Justin Bates said, citing recent data from the land registry which showed a pick-up in house sales since the end of the war in Iraq.

Bid speculation was again swirling around housebuilder Crest Nicholson - up 2p at 288p - despite news that the finance director and chief executive had sold stock.

Fashion retailer New Look firmed 1p to 317p on talk that Icelandic market raider Baugur is interested in acquiring the 27% stake owned by founder Tom Singh.

Innovation Group, the provider of software for the insurance industry, was the most actively traded small cap stock after the company founder and former chairman, Robert Terry, offloaded 26m shares at 12.25p each through Investec Securities.

Demand from institutions for the stock, which equated to about 6.3% of the company, was said to be strong, a fact re flected in Innovation's share price. The stock closed up 0.5p at 12.25p. After the sale Mr Terry, who leaves the company at the end of next month, has a stake of just under 10%.

Photo-Me International, the photo booths and digital mini-labs group, was another talking point among the smaller companies. Its shares, languishing at 20p in January, gained 5.5p to 115.5p on speculation that one of its biggest customers, Eastman Kodak, is considering a bid.

However, market professionals said another possible explanation for yesterday's rise was that investors were buying on the probability that the company will be promoted to the FTSE 250 at next month's quarterly review. Based on last night's closing prices, Photo-Me and publishing group Euromoney, 5p higher at 331.5p, would have joined the mid cap index.

Medical devices company NMT firmed 5% to 1.89p on whispers that it is close to a securing a licensing deal for its second generation safety syringe. But MyTravel's share price eased 0.5p to 26.5p after house broker CSFB lowered its target price to 32p from 75p and cut its earnings forecasts following a meeting with the tour operator.

CSFB reckons operating profit in the second half of the year is now likely to be the same as last year; at the time of its interim results in June, MyTravel said its second half profits would be higher. CSFB now expects MyTravel to post a full-year operating loss in the region of £160m.