The Week In Review: Severn Trent is still short of its high-water mark

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Shares in UK water companies have surged on the wave of bid activity in the sector. And Severn Trent continues to look likely to catch a predator's eye. On Monday, the demerger of its Biffa waste management business will deliver the vanilla water company a yield of almost 4 per cent.

The water company itself is ticking along nicely. Led by chief executive Colin Matthews, Birmingham-based Severn Trent this week reassured investors that trading had been as expected in the six months to the end of September.

Including inflation, sale prices have risen 6.58 per cent from the start of April. Interim profits before tax will be pared by £3.2m, and in the full year by £6.3m, after the regulator Ofwat penalised the company for misleading customers.

Having traded at a "conglomerate discount", analysts at Merrill Lynch expect the shares to rise still higher, and await interest from predators. They may look pricey, but Severn Trent shares are still a buy.

DANIEL STEWART

Broker Daniel Stewart Securities was one of many casualties of the US government's prohibition of internet gaming this week - it has helped several companies come to market and still has a decent slug of shares in the sector. But while a £1.3m loss on these holdings will push the company into the red, the US crisis was a one-off event. Meanwhile, the growing international acceptance of AIM - where it specialises - ensures that prospects look strong. Buy.

CHARTERIS

Charteris is a software consultant struggling to find a coherent growth strategy. The small-fry AIM stock is focused on building expertise in three core areas, including establishing a business to resell Microsoft's Navision products. Yet the firm has few customers in this business. It trades on a bargain basement price of less than 0.3 times sales, but given the work needed to build expertise and compete with its larger competitors, steer clear. Sell.

NORTHERN ROCK

Northern Rock is a well-run mortgage bank and nine months into 2006, the Newcastle-based lender remains comfortable, with City forecasts for profits before tax 15.9 per cent better than 2005. Bad debts will be lower in the second half of the year, and costs remain easily the best in the sector. The downside is the shares, up 20 per cent since July, yield only 2.7 per cent and trade at 11.8 times' expected 2007 earnings. That looks expensive against the 9.9 times typical for UK domestic banks. Take profits.

ADMIRAL GROUP

The car insurer has been one of the FTSE 250's biggest successes since it floated on the London market two years ago. Although conditions look tougher in the coming months, Admiral's diverse portfolio of brands - which include Elephant, Diamond and Confused.com - leave it better positioned than most. Chief executive Henry Engelhardt says Admiral has the lowest cost base in the industry and can afford to continue writing business at current levels. The recent price hikes at Norwich Union can only help. Buy.

CODA

The recent demerger of the Coda business from SciSys may be just the start. The company is now a pure-play accounting software vendor and its management team can focus solely on that market. The shares trade at a premium to its peer group at 18 times' projected 2006 earnings. Coda deserves to trade at a premium due to its steady growth profile and low-risk business model; investors should hold for now.

INTERCONTINENTAL

Intercontinental Hotels Group (IHG) is a hotel giant with seven chains, including Holiday Inn and Crowne Plaza. The company has shrugged off the impact from the Middle East conflict and the UK aircraft bomb plot. This week brought more good news when IHG released August room yield data (revenue per room, or revpar, a key performance measure) for its US operations; all its brands showed strong growth in the month. Buy

CARLUCCIO'S

The high-street graveyard is littered with chains that grew too fast and quickly became naff. Carluccio's, the Italian restaurant and retail chain, is trying to avoid that trap by opening just five new outlets a year. So far, so successful: this week's trading statement showed revenues this year are up 24 per cent. It expects profits before tax to top expectations. The shares aren't cheap, trading on more than 30 times' forecast 2006 earnings, falling to 27.3 times 2007 estimates, according to house broker Altium Securities. Even so, buy.

ALEXON

Anyone trying to understand why shares in Alexon have been off investors' shopping-lists should see some of its recent collections. Its brands, which include Eastex, Bay Trading, Dash and Dolcis, all seem to have been left behind by competitors. Now Seymour Pierce has cut its pre-tax profit forecast by £2.5m to £9.5m ahead of Alexon's trading update next week. In the past, this column has advised holding the shares in the hope of a private equity bid. The chances of that look slimmer than this season's pencil skirts. Sell.

HALFORDS

Halfords has realised just selling replacement wiper blades did not make for the most interesting retail proposition, and a big push into more exciting markets such as cycling and electronic car gadgets, has paid off, delivering a 6.5 per cent uplift in like-for-like interim sales. The bad news in this week's trading update was that gross margins are down. But the shares have long been a stalwart of this column and on a ratio of less than 14 times' earnings do not look expensive. Buy.

S&U

Tough times for home credit - or doorstep lending as the rest of us call it. AIM-listed S&U, the third largest player in the industry, has announced first-half pre-tax profits down almost 10 per cent to £4.8m for the six months to the end of July 2006. "More challenging" trading conditions include mounting bad debt and the intense regulatory spotlight under which lenders have been operating. Still S&U could pick up business as prime lenders tighten credit controls, and further sector consolidation is likely. Hold.

BUSINESS POST

Competing with the Royal Mail is hard work. Business Post should know; the alternative mail carrier has been at it for more than 25 years. Its first-half performance looks encouraging but the real crunch will come over Christmas, which means the jury is out on whether the group deserves its current valuation. The shares trade on a forward price to earnings ratio of more than 28 times its 2007 numbers, according to Altium Securities. Even if the company does manage to wipe out losses at its franchises and continue the growth at UK Mail, it is asking a lot to justify the share price. Sell.

These recommendations are taken from the daily Investment Column

s.mesure@independent.co.uk

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