Tesco feeds fears of lower profit margins

MARKET REPORT

Tesco reawakened fears thatsupermarket profit margins are likely to come under increasing pressure when, as expected, it produced a sharp profit advance, accompanied by cheerful trading comments.

Shares of the leading supermarket chains gave ground with Tesco off 2.5p to 271p.

It was the tell-tale signs the group's margins were feeling the pinch that did the damage. Tesco revealed a slight decline, said to be the result of an initiative to cut prices to counter the growing threat from the strengthening band of discounters.

It was enough to set the stock market fretting about the long-term pressure the industry faces from the discounters, particularly the ambitious Continental groups.

With inflation-inspired growth no longer providing effortless rewards, supermarket shares are now much more vulnerable to margins worries.

Argyll, the Safeway chain, fell 7.5p to 281.5p; J Sainsbury 6p to 425p and Asda 0.5p to 75.5p.

Asda's relative resilience stemmed from support from Socit Gnrale Strauss Turnbull. Analyst Philip Dorgan suggested the revitalised group would continue to outperform rivals, predicting the shares would move to 100p. He forecast profits of £239m this year; £277m next and £316m in 1997.

The rest of the market had another lacklustre session with the FT-SE 100 index lowered 13.3 points to 3,190.9. Higher interest rate worries filtered across the Atlantic and, with New York weak, shares could not, in the quiet, pre-holiday trading conditions, summon much enthusiasm.

They had started well, with the index moving comfortably above 3,200. Then a programme trade, with a strong sell emphasis, created something of a shake-out. Even so, the undertone was judged to be quietly confident with the nervousness so evident earlier in the year again absent. Government stocks were little changed.

But for Eurotunnel it was another nervous day. Poor results had been expected but the tone of the accompanying comments continued to cause dismay with the shares sinking 32p to 186p, not much more than the price of a 1993 warrant from their low. In1989 the shares were 867p. The evolving cross-Channel price war also hit P&O, down 12p to 569p.

Fisons was another in retreat. It was hit by rumours it was on the verge of mounting a take-over bid for Medeva, up 7.5p to 221.5p in busy trading. Such a deal has been mooted in recent weeks with Fisons strong following the group's impressive reorganisation and Medeva enjoying US support. Fisons dropped 7.5p to 175.5p.

Racal Electronics' investment presentation was discounted and the shares fell 2p to 150p.

Willis Corroon, the insurance broker, edged ahead another 2p to 154p as rumours of a US deal continued to circulate. The shares have climbed 12p since stories it could be considering selling its American operations to Alexander & Alexander resurfaced on Friday.

BOC, up 6p at 735p, and Imperial Chemical Industries, 11p at 749p, were helped by Swiss Bank Corporation support. Burton, the retailer, stuck at 78p, unimpressed by Robert Fleming Securities advice to buy up to 100p.

British Aerospace lost some of Monday's exuberance, slipping 9p to 504p. Even the rights issue units were sacrificed, off 4p to 154p. Shell, visiting Scottish institutions, fell 5p to 711p reflectingsell advice.

Meyer International, the timber group, continued to edge ahead, up 4p at 330p, on discreet, speculative demand in a thin market. Wembley suffered from the proposed restructuring. The shares slumped 3.5p to 2.5p but the preference rose 6p to 64p on the improved terms won by Guinness Peat.

Unexpectedly cautious shareholder meetings took their toll. BICC fell 17p to 312p on reports of mixed trading and Heywood Williams, the windows group, lost 17p to 243p following a downbeat statement. But Reuters edged up 2p to 488p with trading said to be in line with forecasts.

On the results front, Yule Catto, the chemical group, jumped 19p to 270p following a 56.6 per cent profits rise to £28.5m. Tarmac lost 3p to 116p despite better-than-expected figures of £107.2m.

The planned £181.2m sale of its automotive products side lifted BBA 7p to 211p.

RJB Mining edged forward 3p to 383p. The shares have risen from 358p since the start of the month. Bullish forecasts for coal demand have helped.

Rhino, the struggling computer games retailer, held at 8p as its rescue rights issue attracted only a 50 per cent take-up. It is hoped to place the unwanted shares.

B Elliott, the engineer, held at 95p as Beeson Gregory placed shares at 90p to raise £1.59m. The cash will reduce borrowings and finance some joint ventures.

Alliance Resources, thought to have a development in Albania in its sights, is buying North American properties for $3.1m.

The FT-SE 100 index fell 13.3 points to 3,190.9 and the FT-SE 250 index 6 to 3,484.3. Turnover was 682.2 million shares with 22,592 bargains recorded.

Multimedia Corporation, a buyout from the BBC in 1990, started trading on the 4.2 share market, achieving a 25p premium over its 360p placing price. A small amount of stock, which was on offer from the stockbroker Shore Capital, was said to be at least ten times over-subscribed. The group's main product is a 3D atlas.

Forte, the hotel group, rose 2p to 140p; figures are due today. Profits are expected to show a heady advance. NatWest Securities forecasts a 45 per cent gain to £126m. The group has raised cash from disposals but following its Meridien take-over has debt of around £1.6bn. With the hotel market recovering, the company could be tempted into making a rights issue.