The Investment Column: Northumbrian Water rides the rising utilities tide

API Group; Premier Asset Management
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The Independent Online

Our view: Hold

Share price: 306.25 (unch)

Northumbrian Water yesterday became the latest water company to unveil a sharp rise in profits as a result of the hefty price rises allowed by the industry's regulator.

The group, which serves 4.3 million people in the north-east and south-east of England, posted a 17.4 per cent jump in first half profits to £75.5m. Sales increased to £315m during the period from £295m and the company was able to lift its dividend by 6.5 per cent to 3.75p per share.

Northumbrian has hiked the prices it charges households by 6.1 per cent this year. This came on top of last year's 10 per cent increase.

Given the group's profit performance it is no surprise to see its shares doing well. They have risen by 20 per cent since the start of the year. However, behind this advance is also a hope among investors that the group will be taken over.

Infrastructure investment funds and private equity firms have piled into the utility sector this year. In the past two months alone, Thames Water and Northern Irish electricity provider Viridian have both been bought by financial companies which are attracted to their predictable cashflows.

The owner of North East Water and Suffolk water is now probably the most vulnerable to takeover due to its small size. Its biggest shareholder, the Ontario Teachers Pensions Plan, is often mentioned as a possible bidder. However, Northumbrian's management was yesterday keen to stress that the Canadian fund is a long-term investor in the company and has shown no interest in bidding.

Ontario Teachers picked up its 25 per cent stake in April 2005 at 200p, enjoys board representation and is already showing a handsome paper profit on its investment. So if there is going to be a move on the company, it is likely to come from elsewhere.

With share prices across the water sector sitting at near all-time highs, it is important for investors to hunt out cheap stocks. Northumbrian, alongside Pennon, is one such stock and worth holding on to.

API Group

Our view: Sell

Share price: 81p (-5p).

You know a company is struggling when even its own broker has a sell rating on its stock. API, which makes packaging, is such a company. Following its annual results yesterday, Numis Securities urged investors to abandon the stock and set a price target of just 66p. It was right to do so.

API unveiled a dire set of numbers. The group slumped to a pre-tax loss for the year to 30 September of £1.8m, compared with a profit of £3.6m last time around. Borrowing soared by £8.8m to £15.5m. Why the losses and the extra debt? Well, the company is investing heavily in the construction of a new facility in China. It plans to move up to 25 per cent of its US and European production to the Far East in the next three years to take advantage of the low costs associated with operating there.

Earlier this year, it started building a 300,000 sq ft factory near Shaghai which will become the group's main worldwide production centre for mainstream, high-volume products. It is scheduled for completion in the middle of next year, but Numis believes the benefits of the project will not be evident to shareholders until well into 2008. It is now more than obvious that API made a big mistake when it rejected that 200p a share takeover approach from Illinois Tool Works of the US last year. Although the decision to move production to the Far East is clearly the right one, the company now faces a long road to recovery.

Premier Asset Management

Our view: Buy

Share price: 208.5p (+3.5p).

Boutique fund manager Premier Asset Management has had quite a year. After making some small acquisitions and hiring some relatively high-profile fund managers, new business has started freely flowing in the door.

Publishing its full-year results yesterday, the company revealed that its profits had risen an impressive 256 per cent, on the back of an 82 per cent rise in turnover for the 12 months to the end of September. This strong result was mainly driven by its increase in scale, which has helped it to vastly increase its profit margins.

With assets under management of just £1.5bn, Premier is still a tiddler in the crowded world of investment management. But by slowly building itself a good reputation among independent financial advisers, while building scale through bolt-on acquisitions, it has created a good momentum.

Even after its sharp jump in operating margins this year - now at 6.4 per cent - the group is still a long way off the industry standard of around 30 per cent, which gives an idea of how much room there is for improvement.

Trading at just under 20 times next year's forecast earnings, the company is relatively cheap compared to its peers - even though its shares have almost doubled over the past 12 months. Add in yesterday's news that it is to begin paying shareholders a dividend, and the stock looks more attractive still.