Bluechip: TEG slowly regains energy

It is still early days for The Energy Group (TEG), in its new incarnation on the stock market after being spun off from Hanson last month.

Reflecting that, the shares have been all over the place and remain an unpredictable quantity. From a strong start, rising to 568.5p on bid speculation from their 535p flotation price in mid-February, they had slumped to a low of 466.5p a fortnight ago as no predator appeared. They have since begun a quiet recovery and currently stand at 509p.

While utility shares continue to enjoy a following among investors, TEG is sufficiently different to make it a harder task to value compared with its peers.

For a start, it is unique in having a transatlantic mix of business, with Eastern Group, the largest UK regional electricity company, sitting alongside Peabody Coal of the US.

Recently, it paid $120m (pounds 74m) for Citizens Lehman Power, one of the largest power traders in the US. The move confirms its stated ambition of building up an integrated power business in the US.

Management believes it can transfer its expertise in the UK energy market to the US. However, the UK rarely has anything to teach the US, so why should TEG be an exception to the rule?

More immediately, it is the UK that will shape the group's future over the next few years. Eastern is now a vertically integrated business: as well as electricity distribution, it is the fourth biggest power generator, after leasing coal-fired power stations from National Power and PowerGen.

And it has a substantial presence in the gas market. Eastern Natural Gas is the second biggest gas shipper after British Gas, and has pilot schemes for domestic competition under way in three areas, including Kent and Sussex.

So where does this leave the company? Clearly, the stock market has had a hard time valuing the business - that much was clear at the time of the flotation, when analysts' range of valuations was notable chiefly for its divergence.

At a meeting last Thursday for investors, the group said it predicted a bright future, although an element of special pleading was apparent.

TEG, as it stands, is taking too much on trust. For those who inherited it at the demerger, the shares represent a long-term hold. But there is little reason to buy into it as a new investor.

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