Smiths medical rumour peps up trading floors

Smiths Group, the FTSE 100 industrial conglomerate, pulled further away from its recent three-and-half-month low yesterday as break-up rumours did the rounds again.

Shares in the aerospace, medical devices and airport security group hit their lowest level since November 2005 last week as investors lightened their holdings after a disappointing trading update.

However, the stock was one the best performers in yesterday's becalmed London market as speculation of a demerger swirled through dealing rooms.

Talk that Smiths might spin off its medical business to concentrate on its aerospace and detection businesses is not new. But analysts are prepared to give the rumours credence this time round because of the company's recent poor performance and change among senior executives.

Historically, demergers have generated value for shareholders and if Smiths were to spin off its medical business the rump of the company would be a tempting takeover target for US rival Honeywell, which is looking to increase its presence in the aerospace industry.

Smiths, which is set to file half-year figures on March 15th, rose 16.5p to 944.5p.

In the wider market, leading shares went nowhere for a second day. The FTSE 100 closed 0.8 points lower at 5,791.5 as investors decided to digest the first public speech by Ben Bernanke, the new chairman of the Federal Reserve, rather than buy or sell anything. The FTSE 250 index advanced 14.3 points to 9,344.6, while the FTSE Small Cap index eased 2.8 points to 3,534.5.

Airports operator BAA was the FTSE 100's biggest riser, gaining 31.5p to a high of 810.5p following reports that two groups had approached Ferrovial about joining its bidding consortium. Not far behind BAA was British Airways, which gained 11p to 334.5p as US crude futures fell below $60 a barrel.

Elsewhere, Cairn Energy rallied 36p to £18.39 after house broker ABN Amro suggested it could be a takeover target.

"The majors are chronically short of oil, with reserve replacement running below 100% in virtually all of them. This in our opinion supports sector consolidation, and Cairn's large scale ultimately makes it an obvious target," the Dutch broker said.

BBA, the aviation and materials group, was among the FTSE 250's biggest fallers. Its shares slid 8.5p to 304p after Panmure Gordon downgraded it to "hold" citing concerns of a lower than expected price for Fiberweb. Reports over the weekend claimed BBA had agreed to sell the division to Polymer Group for around £650m, which was £100m short of the asking price.

Isoft Group, the healthcare software company, slipped 6.75p to 175p, unsettled by an article on e-health-insider.com, which claimed that it was far behind schedule on its Lorenzo patient record system. According to papers seen by e-heath, the North West and West Midlands Strategic Health Authority did not expect Lorenzo to be available until the end of 2007.

Commenting on the article, Dutch broker ABN Amro said: "We believe that this continues to highlight the uncertainty and risk at Isoft, with little visibility as to when the company can start recognising revenue and getting paid from the [NHS's Connecting for Health] programme."

SCi Entertainment, the computer games developer, improved 10p to 490p despite the termination of long-running takeover talks. Traders said the shares had been supported by a bullish note from house broker KBC Peel Hunt. It believes the integration of Eidos is now complete and the cost savings will be in excess of the targeted £14m, perhaps by as much as 40%. Moreover, KBC reckons SCi could shift 3m copies of the new Tomb Raider game.

Among the small caps, NSB Retail Systems gained 1.5p to 33.25p after a stock overhang was cleared, while Goals Soccer Centres firmed 5p to 177.5p on rumours of strong trading. Protome Science advanced 6.75p to 64.75p amid talk of a licensing deal for its Tandem Mass Tags.

There was heavy trading in Torex Retail, the acquisitive retail software group, which recently parted company with its finance director. Over 26m shares changed hands after the publication of a hard hitting research note from Bridgewell Securities.

"Contrary to the impression given by Torex's recent statements, we believe the company is failing to deliver underlying growth in its core UK and European store systems markets," analyst Peter Carter said, as he initiated coverage with an "underweight" recommendation and 94p target price. Torex shares firmed 0.5p to 105p.

There was also heavy trading in car dealer Reg Vardy, off 5p at 900p, after Pendragon, up 0.5p to 567p, snapped up 10m shares, or 17.8% of the company, at 900p. Following that purchase, Pendragon said acceptance for its 900p offer for Vardy stood at 73%.

Of new issues, AdEPT Telecom, a telecoms reseller, started trading on Aim. Placed at 140p following an £8.2m fundraising the shares came to rest at 149.5p. Roger Wilson, the chairman, has big plans for the company and intends to use the cash raised from its stockmarket listing for acquisitions.

Cattles, the consumer credit and debt collection group, emerged with the best performance in a weak FTSE 250 yesterday after its recently appointed house broker started coverage with a "buy" recommendation and target price 17% above yesterday's closing price.

Citigroup believes Cattles, which has yet to recover from last April's accounting change that forced the company to alter the way it booked commissions from the sales of payment protection insurance, offers excellent value. It says the company is set to deliver double-digit earnings growth over the next couple of years and boasts a dividend yield of around 5%. With its new distribution agreements, Citigroup reckons the shares are worth 385p. They closed 16.25p higher at 328.25p last night.