The Week In Review: Despite price rises, it's still up, up and away for Centrica
Saturday 15 May 2004
British Gas raised prices to its millions of UK customers in January, and hundreds of thousands of them took the advice of energy watchdogs and defected.
British Gas raised prices to its millions of UK customers in January, and hundreds of thousands of them took the advice of energy watchdogs and defected. A worrisome note sounded at the parent company's shareholder meeting this week was that, with wholesale energy prices picking up, BG's profit margins are going to come under further pressure. It doesn't look likely customers will swallow another rise.
One mustn't despair, though, since rivals will have to follow if prices keep going up. Centrica is also naturally hedged, with interests in power generation. Margin pressure is real, but Centrica is cutting costs.
Centrica has assembled an extraordinary collection of assets. These go upwards from BG and equivalent domestic energy suppliers in North America, into power stations and gas storage. They also go outwards into telecoms (through One.Tel, which should benefit from further deregulation of the UK market) and motoring and financial services, via the AA.
This is a company throwing off more cash than it can reinvest. Dividend hikes and share buybacks are in prospect for years. The shares are not bargain basement any more, but new investors would pay a fair price for a stock with good prospects. Buy.
Who would be a traditional mail order retailer? This old fashioned market shrank by another 7 per cent last year. Companies such as Next, which has a thriving catalogue business, rely on a high street estate to persuade customers to order from its directory, with the shops providing a useful dumping ground for all those outfits that looked better on the page than on the body. N Brown doesn't have the luxury of a store network. Any investors still hanging on to the stock should sell.
Part of Dimension Data's attraction is that its interests are spread both internationally and operationally. Its core business is basically hand-holding. It will build for corporate clients their IT networks, putting together all the servers and other bits of kit sourced from different suppliers. It then looks after the network, upgrading it when necessary and integrating new technology as and when. Growth areas for Dimension Data include offering the same clients data storage and back-up facilities. This should be a long-term winner.
It is pretty simple to make money when your customers are addicted to your product. The important thing for investors is that Gallaher - the company behind the Benson & Hedges and Silk Cut cigarette brands - is pushing into emerging markets more quickly than it is suffering declines in the West. With a dividend yield of just under 5 per cent, it is a solid hold.
Spirent has been building market share in an awful market for its goods, which include testing kits to analyse the performance of new telecoms equipment or the quality of service being offered by a telecoms network. Best of all, it has kept the research and development spending up, and is ready to emerge into a new cycle of telecoms industry spending with gadgets for a new generation of broadband, internet protocol and 3G mobile systems. Long-term buy.
ROBERT WISEMAN DAIRIES
The doorstep delivery of the daily pinta is becoming a thing of the past, as more Britons buy in bulk from the supermarket or corner shop. Robert Wiseman Dairies has been milking the phenomenon, winning new contracts to supply own-label milk to supermarket groups. The booming convenience store market, the new battleground for supermarket chains, offers more potential for growth. Hold.
The screaming undervaluation of Bizspace shares identified last year by Jack Petchey, the septuagenarian property sector investor, has been largely rectified by the market. Short-lease accommodation for small businesses has proved a resilient market. In the good times, growing businesses need to move fast into bigger premises; in the bad times, they can downsize into Bizspace's cheap and cheerful premises. The company also has a wide variety of tenants, providing further safety. Hold.
Ashtead hires out diggers, pumps and cranes to the construction industry from 423 depots, mainly in the US and UK. There have been countless profit warnings, accounting irregularities and crippling debts, but a refinancing means the group will still be around to benefit from any up-turn in the US construction market. The company has won a stay of execution but it is not out of jail yet. The shares are only for the brave.
JKX Oil & Gas knows all about the hazards and upside of working in the resource-rich former Soviet Union. A couple of years ago, armed gangsters tried to seize control of its principle asset in Ukraine. JKX's progress in Ukraine, which is mostly a gas story, has been remarkable. The company now has form ownership of its assets and is exporting gas from the country. The shares have soared, making JKX a hold.
Next is used to being on the losing end of the stockmarket's obsession with like-for-like clothing sales. But the 3.1 per cent rise in like-for-like sales it unveiled this week more than soothed City fears. Some analysts had worried that, given the gloomy start to summer, the group's sales would have been flat, if not down. The group may need a makeover in the medium term, but its expansion story is not over. The shares remain a core holding.
BANK OF IRELAND
Bank of Ireland reported an 11 per cent rise in annual pre-tax profits and demonstrated progress on slicing costs. It has cut branches and jobs from the under-performing Bristol & West and the financial advice chain Chase de Vere. This has helped boost income by 5 per cent, while costs only rose by 2 per cent. The shares trade on a forward multiple of 9 times, which is a slight discount to the sector. Given the group's prospects for growth, BoI's shares are worth tucking away.
Securicor wards off risk
Armed robberies are cyclical. Securicor, whose guards transport cash to and from banks, is currently enduring an upswing in attacks, as the criminal community gets wise to the company's most recent changes to procedures and vehicle design. As well as the lost money itself, Securicor will have to pay out on further improvements to the way it does business - which should flummox the felons for another cycle.
Heists aside, the security group has put in a creditable performance over the past six months. Better still, a plan it hatched in February to merge with its Danish rival, the once-derided Group 4 Falck, is well advanced, which has much improved the prospects for the shares.
The expectation is that the combined company will be able to raise its earnings by a fifth for each of the next two years, thanks to a £35m cost-savings programme, mainly in the vast European security patrol business. Security remains an intensely competitive market, but new rules requiring guards to be licensed and trained may force some of the smaller players to the wall.
This is not a share for the pension fund. The dividend is not generous and significant sales growth will be hard to come by. But merger-based earnings enhancement and the current valuation - at a 30 per cent discount to the market leader - suggest it could be a medium-term banker for new investors.
The above are a selection of recommendations from the daily Investment Column
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