Bottom Line: Water proves its worth

WITH just Wessex's results to come next week in the water companies' interim reporting season, the privatised utilities have once again proven their worth as safe stocks.

Although on average they have grown dividends at less than half the rate of the regional electricity companies, they provide good yields that will become more attractive as interest rates fall further.

Southern Water, which yesterday produced the sector's most impressive set of figures, is among the most financially robust of the 10 companies. It had net cash of more than pounds 30m in the bank at the end of September, although heavy capital spending means this will fall sharply by the end of the year.

Its cautious approach to developing its non-regulated businesses has also paid off. Although small, they are generating respectable profits and actually produce net interest gains rather than the heavy financing costs being borne by most other companies' non- core divisions.

At yesterday's price of 660p, up 12p, the shares are on a prospective multiple of just above nine, based on forecasts of a pounds 128m pre-tax profit for the full year. That makes Southern the third most expensive stock in the sector. Given its fundamentals this is fair, but it is unlikely to move ahead sharply.

The same could be said for the water sector as a whole, which is still dogged by regulatory uncertainty. Ofwat has made it plain that it will continue to squeeze the companies to keep water charges as low as possible for consumers.

It now looks unlikely that the loosening of European Union directives on drinking and bathing water will greatly affect the companies' capital expenditure requirements. The real driving force behind these massive investment programmes is the urban waste water directive, which remains firmly in place.

As a result the sector will probably mark time, although its attractive yields - forecast to move beyond 5 per cent in the year to March 1995 - may keep interest alive, especially as the downside is limited.