Leading shares are heading for their lowest levels since January as the Greek crisis continues to grip investors.
With the two day US Federal Reserve meeting starting - and a decision on rate rises on Wednesday - markets continue to come under pressure.
So the FTSE 100 is currently 33.90 points lower at 6676.62. Tony Cross, market analyst at Trustnet Direct said:
The FTSE-100 has opened with broad-based losses once again as fears continue to build over the risk of a Greek exit from the Eurozone. With no suggestions Athens is getting any closer to its creditors and Thursday’s meeting of European Finance Ministers – seen as the last opportunity for extending the bail-out plan – looming, it’s perhaps no surprise that traders are now actively taking money off the table.
No one is expecting a US rate rise this month, but the Fed’s comments will be scoured for clues as to its views on when borrowing costs will be increased.
But amid the gloom there are some risers. British American Tobacco is up 56.5p to £34.68 and Imperial Tobacco has added 25p to £32. Part of that is the companies’ attractions as defensive stocks, but they have also been helped by an upgrade from Credit Suisse. The bank has restarted coverage of the two after the recent merger of Reynolds and Lorillard - in which both were involved - and said:
We reinstate our rating on BAT with an outperform, price target £38. BAT has arguably the most consistent track record in consumer staples, even for a sector renowned for such attributes. It has consistently delivered 10% constant exchange rate earnings per share growth, with price and margin the key levers. Where the model may differ in the coming years is the use of cash flow. Historically the group has chosen to return cash through share buyback, but with net debt/EBITDA over 2.5 times following recent M&A the short-term emphasis will be on debt reduction.
This recent M&A has interesting implications on the group’s profit mix and valuation. Imperial Tobacco may well receive plaudits for its new-found US exposure, but BAT also now also earns around 20% of its net profit in the US (2016 estimate) - and arguably through a better business in its 42% stake in Reynolds.
On Imperial - which bought a number of brands from the merged group - Credit Suisse also issued an outperform rating and a £36 price target:
The $7.1bn acquisition of some US brands from Reynolds has the potential to be a game changer for Imperial. It transforms the US business, giving it a decent foothold in the world’s largest tobacco profit pool - which will now be 20% of group profits - a market that is growing 5% per annum and is very affordable (scope for pricing), and all this for a very modest price/multiple by tobacco standards.
The acquisition won’t be without its challenges, notably reversing the long-term market share decline, but there will be very significant synergies to reinvest, and the Lorillard salesforce and infrastructure is a big boost.
Elsewhere National Grid - another defensive stock - is up 6.1p at 854.7p as Morgan Stanley moved to overweight with a 955p price target. The bank said:
National Grid stands out in the European utility sector for its low-risk total return and valuation versus regulated peers. We see attractions in all three of National Grid’s business areas and move to overweight.
But mining shares have slipped back as iron ore prices fell below $65 overnight. Rio Tinto is down 27p at 2779.5p and BHP Billiton has slipped 7p to 1313.5p.
Royal Mail is down 10.2p at 494.8p after Ofcom said it would review the regulation of the business after rival Whistl withdrew from the direct delivery market.
