Market Report: UBS casts a cloud over the water companies

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Since January 2004, water stocks have on average risen by a whopping 60 per cent. This in part has been driven by the outcome of last year's water price review, which was more positive for the industry than even the most optimistic expectations.

These days, such is the belief in the reliability of earnings at the likes of Kelda and AWG that their shares are treated as if they were bonds by the market - that is, investors believe they will pay out solid dividends come what may.

However, UBS believes these are unrealistic expectations and warns that clouds are gathering on the horizon for the industry. The Swiss broker fears that the next water review could well see regulators impose a tougher regime on companies. This would certainly eat into their profits, as would rising energy costs. UBS calculates that the recent sharp increase in energy prices may mean that 2006 earnings forecasts for the sector will have to downgraded.

Meanwhile, the FTSE 100 continued its march higher, gaining 29 points to close at a new 44-month high of 5,344. BPB lost 3p to 731p as Dresdner Kleinwort Wasserstein highlighted to its clients the fact there is a good possibility that Saint-Gobain's offer for the plasterboard maker will fail. DKW takes the view that there is a 42 per cent change that BPB will remain independent and that if it does the group shares will fall back to somewhere between 603p and 650p.

Royal Bank of Scotland lost 27p to 1,622p after Lehman Brothers scaled down its rating on the banking giant to "equal weight" from "overweight". The US brokerage was unimpressed by RBOS' interim results last week and is now less confident that the group can continue to generate superior growth. Lehman said it cannot see any positive catalysts on the horizon which are likely to buoy RBOS shares.

In the FTSE 250, there were four sizeable share placings. Banknote maker De La Rue fell 12p to 372p after Citigroup placed 4.2 million shares at 369p, AB Ports retreated 8.25p to 462p as Morgan Stanley sold 9.6 million shares at 460p and George Wimpey lost 16.5p to 408.75p after brokers placed around 16 million shares on behalf of an institution at 412p. Bodycote, down 9.25p to 195p, was the worst hit of the four after the sale of 16 million shares at 198p by Dresdner Kleinwort Wasserstein.

Aegis dropped 4.75p to 120.5p as Bridgewell Securities talked down the prospect of an outright takeover of the company by Vincent Ballore, who last week declared a 6 per cent holding in the media buyer. Bridgewell said: "Given recent history, it is not Mr Bollore's style to offer a premium to minority shareholders."

The broker takes the view that the Frenchman is much more likely to try to push for a merger between Aegis and Havas, where he has a 22 per cent stake, once he has built up a significant enough holding in the UK company. However, Bridgewell urges investors not to get too excited as it is likely to be a zero premium merger.

BATM Advanced Communications was last week talked of as a possible takeover target. Yesterday, it rose 3p to 24.5p as traders took the view that consolidation among telecom equipment makers looks increasingly likely following news that Marconi is in offer talks with China's Huawei Technologies. Emblaze put on 10.75p to 157p after the telecoms technology group boasted that it is experiencing significant growth across all its divisions.

Zenith Hygiene ticked 1p higher to 154.5p on whispers it is close to winning a contract to supply the National Health Service with cleaning products. Z Group rose 3.5p to 148.5p on hopes the firm will soon unveiling further licencing deals for its internet software. Jarvis, down 0.35p to 3.95p, continued to lose ground ahead of the upcoming debt-for-equity swap at the support services player.

Finally, word has it that Table Mountain, which had its shares suspended last week at 11.5p, will this week return to the market with news of a sizeable acquisition.

According to one well informed corner of the Square Mile, the group is close to clinching the purchase of North Sea oil assets which will also bring some significant oil industry names to its board of directors. Originally, Table Mountain was created to acquire mining rights in South Africa, but this plan has now been scrapped.