Bottom Line: Waste means want not for Wessex Water

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WHILE other water companies have yet to prove that they can manage unregulated businesses, Wessex Water has hardly put a foot wrong. Taxable profits rose by one-fifth to pounds 53.4m in the six months to 30 September. The dividend is up 10 per cent to 8p, although dilution from its rights issue meant earnings slipped to 31.4p.

Wessex is entering the regulatory doldrums in good shape. By keeping down costs while water prices rose 6 per cent, it has lifted operating profits from the core water business to pounds 47.6m (pounds 42.1m). It is also making a good job of diversification. Wessex Waste Management, the joint venture company, raised its contribution from pounds 1.6m to pounds 4.2m. Despite difficult trading conditions it achieved 20 per cent margins. With tighter environmental laws on landfill operators in force from next May, WWM is well placed to benefit.

The rights issue means Wessex Water holds pounds 53m cash and will end the year in surplus. A modest capital expenditure programme averaging pounds 120m a year, better than three times dividend cover, and the waste management business provide a bulwark against any squalls from the 1995 period review by Ofwat, the consumer watchdog. The shares, trading at a 20 per cent yield premium to the market, still look attractive.