Investment Column: Severn afloat on uncertainty

Arla milks merger benefits for profits boost; Steer clear of Christian Salvesen after poor results

Severn Trent has raised some eyebrows in the City with the planned departure of four top directors.

Severn Trent has raised some eyebrows in the City with the planned departure of four top directors.

The annual results yesterday showed all is well in the water company's operations but analysts worry that a new team could lead to a strategy change.

By the end of the current year, the chief executive, chairman, finance director and managing director of the core water business will have left. The message yesterday from Robert Walker, still chief executive, was very much that the current strategy would continue.

While this seems the most likely outcome, much depends not only on the new management but also what the water regulator concludes from the next five-year period, which begins next year.

Severn Trent is a good business which has not gone down the heavily indebted strategy of some of its water industry rivals. It provides water and sewerage services to 8 million people in the UK, from the Bristol Channel to the Humber Estuary. That is the core regulated business, which provided £338m of the £441m of operating profits in the year to 31 March. Alongside that is a growing, non-regulated business, comprising Biffa waste management and SVT services, which provides a labs and purification business, contract operations and billing systems.

Five years ago, non-regulated operations made up 10 per cent of turnover. Now it is more than half. Severn Trent has made two significant acquisitions in the waste business.

The water industry is waiting for the sector regulator to pronounce on the next five years. Severn Trent has put in for an ambitious £2.9bn capital expenditure programme that would be financed by a 31 per cent rise in prices. The signs are that the regulator will be gentle on the industry but this remains an area of obvious risk.

Severn Trent shares, at 808p, have had a good run since September, making this a hold.

Arla milks merger benefits for profits boost

The human kindness of milk looks set to give Arla Foods' UK shareholders a profitable ride for the next two or three years. The company, a product of last year's merger with Express Dairies, announced yesterday a higher-than-expected maiden interim pretax profit of £21.1m and unveiled a two-year contract with TNT to deliver parcels and large letters on its milk floats.

The TNT deal came soon after the group surprised its rivals by winning the contract to supply Asda supermarkets. While the TNT tie-up has unquantifiable potential, Asda gives Arla a solid underpinning.

Meanwhile the other side of its business, dairy brands, is roaring ahead. Its Lurpak brand grew 10 per cent in the six-month trading period, Anchor Spreadable was up 13 per cent from a low base, and Cravendale milk slurped ahead by a mouth-watering 23 per cent.

Cravendale, one of the UK's few luxury milk brands, still has only 3 per cent of the total market, so there is far to go.

Arla is busy rolling out the full milk product range under the Cravendale banner, from cream and cheese to "adult" flavoured milks. This will help to offset a declining market in doorstep sales.

On the cost side, the company is going for £20m of savings from the merger. The shares, at 59p, have had a useful run, they still trade on an undemanding p/e of 11.3 for the current year and yield of 2.5 per cent.

Oriel Securities believes the economies and sales growth in the pipeline should take the earnings multiple down to seven within two years. Buy.

Steer clear of Christian Salvesen after poor results

Christian Salvesen, the logistics group, posted another set of poor results yesterday, confirming investors' fears that its troubles of the past two years are still far from behind it.

A year ago, after the group had already made three profits warnings in the previous 15 months, this column advised investors to avoid the stock. Since then, things have got worse. After a failed takeover bid last summer, shares slumped once more, and have never recovered. By April this year, the group was issuing yet another profits warning, which was followed last month by the departure of its chief executive of seven years, Edward Roderick.

While investors may have been heartened by the board's move to inject fresh life into an increasingly stale business, there was disappointment that Mr Roderick would walk away with a £900,000 pay-off.

After another rough year, there is almost a feeling of defeatism emerging from the company. At yesterday's annual results, which showed a 15 per cent drop in profits, even the finance director conceded that short-term prospects don't look good, with its margins set to remain under pressure. The only good news was that the dividend was kept intact. Mr Roderick has yet to be replaced, and maybe new blood will be just the tonic. But with the shares down more than 20 per cent since last year, this is still a stock to steer clear of in 2004. Avoid.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Arts and Entertainment
Kara Tointon and Jeremy Piven star in Mr Selfridge
tvActress Kara Tointon on what to expect from Series 3
Voices
Winston Churchill, then prime minister, outside No 10 in June 1943
voicesA C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
News
i100
Sport
footballBrighton vs Arsenal match report
Arts and Entertainment
Benedict Cumberbatch has spoken about the lack of opportunities for black British actors in the UK
film
News
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Recruitment Genius: Outbound Sales Executive - OTE £25,000

£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Java Developer / J2EE Developer - Watford - £45,000 - £47,000

£45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...

Ashdown Group: Marketing Product Manager - (Financial Services) - SW London

£35000 - £38000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Day In a Page

Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project
Diana Krall: The jazz singer on being friends with Elton John, outer space and skiing in Dubai

Diana Krall interview

The jazz singer on being friends with Elton John, outer space and skiing in Dubai
Pinstriped for action: A glimpse of what the very rich man will be wearing this winter

Pinstriped for action

A glimpse of what the very rich man will be wearing this winter
Russell T Davies & Ben Cook: 'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'

Russell T Davies & Ben Cook: How we met

'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'
Bill Granger recipes: Our chef serves up his favourite Japanese dishes

Bill Granger's Japanese recipes

Stock up on mirin, soy and miso and you have the makings of everyday Japanese cuisine
Michael Calvin: How we need more Eric Cantonas to knock some sense into us

Michael Calvin's Last Word

How we need more Eric Cantonas to knock some sense into us