Bottom Line: Welsh Water takes a sharper approach

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WELSH Water's new chairman, Iain Evans, may have promised to learn the principality's native tongue when he took the reins, but his background as a hard-headed management consultant should ensure unsentimentality when it comes to running the business.

Such an approach can be seen in Welsh Water's first set of figures since Mr Evans took over from the more flamboyant John Elfed Jones in April. Mr Evans and his new chief executive, Graham Hawker, have tied up the niggling loose ends that unsettled some in the City, disposing of a quixotic stake in South Wales Electricity and leasing its hotels to Resort Hotels.

The 15 per cent stake in Swalec netted a profit of pounds 17m for Welsh Water, but its genesis, as part of a grand plan to form a super-utility, was ill-conceived and distracted the company from the real task of finding a viable non-regulated concern to complement the core water business.

The hotels were another distraction - there being no evident overlap in management skills between running a water company and being a hotelier. The change led to a pounds 2.2m write-down in the properties' value.

The management now says it has found its way forward through the acquisition of Acer, an engineering consultancy bought for pounds 56m earlier this year. Acer is being integrated with Welsh's existing Wallace Evans consultancy business and Mr Evans says it should enhance earnings this year.

But the departure of three of Acer's executive directors and a pounds 40m goodwill write-off against reserves leave a question mark over the value of the purchase of Acer, although Welsh Water explains the management changes in terms of a difference over policy.

Welsh says there is still growth to come from areas associated with the regulated core business, such as electricity generation from its dams, transport and plant maintenance.

The water business runs smoothly and produced a 9.7 per cent rise in operating profits to pounds 131.9m. But total operating profits were just pounds 126.3m, demonstrating that Welsh has still not sucessfully got to grips with the non-regulated businesses.

The pre-tax figure of pounds 155.5m has been inflated by the one-off pounds 17m gain from the sale of the Swalec stake. But that has left earnings on a plateau, with analysts expecting about pounds 145m before tax this financial year.

The shares jumped 9p to 562p yesterday, showing the market to be pleased with the firmer sense of direction being exhibited by the company. That leaves the company on a prospective p/e ratio of just under six, roughly the sector average.

The new management deserves the benefit of the doubt, but it is still too early to say whether its sharper approach will work more wonders than can be achieved by other water companies. Until more performance is seen from Welsh Water's unregulated businesses, there is no compelling reason for investors to chase the shares.