Arena has plenty of hurdles ahead

Split will bring clarity at South Staffordshire; Chaucer's tale is uplifting but times have changed
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The Independent Online

Millions tuned in to watch Amberleigh House romp home in the Grand National this weekend, but the future of British horseracing on television is still in doubt. This makes the going for Arena Leisure - the racecourse owner that is part of the consortium behind Attheraces, the satellite racing channel - rather treacherous at present.

Millions tuned in to watch Amberleigh House romp home in the Grand National this weekend, but the future of British horseracing on television is still in doubt. This makes the going for Arena Leisure - the racecourse owner that is part of the consortium behind Attheraces, the satellite racing channel - rather treacherous at present.

Screens have been blank on Attheraces, whose other owners are Channel 4 and BSkyB, since last week after the contract to broadcast racing from 49 of the UK's 59 courses collapsed. Punters may have been watching the channel, but they weren't betting through it, leaving Arena short of the revenue it had expected.

The Office of Fair Trading yesterday confirmed that Attheraces had broken competition rules when it block-booked a £307m deal to broadcast racing from 49 racecourses. Negotiations must now be done with each course owner individually.

Attheraces's owners now know their business model was flawed and will not want to pay nearly as high a price for broadcasting rights. Arena, which took a loss of £5.6m at the half year on Attheraces, may end up as a non-runner in the broadcasting field if, as seems likely, BSkyB takes over the whole show. This could be welcome, as it would force Arena to cut its losses on the channel and concentrate on its core business of running racecourses, where it has delivered results. Its technology division, which includes Attheraces and fixed-odds betting through Sky, accounts for just 16 per cent of the business and, at the half year last June, revenues from its racecourses were up, while technology fell.

Whether or not it pulls up on Attheraces, more significant for Arena is the OFT's full inquiry into the horseracing industry, due later this year. This will free up the fixture list and may prove beneficial to Arena, but adds another layer of uncertainty.

Shares in the company have dropped since January, when Attheraces announced it was likely to switch off. The disaster may have already been priced in, but a recovery is far from nailed on. Don't back this one.

Split will bring clarity at South Staffordshire

South Staffordshire does the splits today. The company, originally a small water utility, has grown exponentially in recent years thanks to the establishment of Home Service, an emergency plumbing business that was offered to customers for a flat rate annual "insurance premium". Home Service now accounts for two-thirds of the group, having expanded into a national network offering cover to customers of most of the UK's water companies, and also through expanding its business model into upholstery repair (via furniture retailers' extended warranties) and locksmithing. The stock was at 466p when we said it was undervalued in 2002; it ended yesterday at 642p.

So shareholders have voted to rename the group Homeserve and hive off the unloved water business into a new company to be called, unoriginally, South Staffordshire.

Yet it is the water business that is, on balance, the more attractive of the two. It will have a dividend yield of nigh on 8 per cent. There are unlikely to be major capital gains available, but the share price should hold up during the five-yearly price review by regulators, which ought to be benign for a company with South Staffordshire's enviable record of efficiency and customer service. It is a buy for income investors.

Homeserve is worth holding, but the major growth of the business is set to come now from riskier ventures outside the UK, while it is unclear how much extra demand can be created in its home market, where it has 1.7 million customers already and where operational hiccups are inevitable.

Chaucer's tale is uplifting but times have changed

Chaucer's tale has been one of recovery since shareholders stumped up £43m last May to help the business capitalise on the boom-time conditions in the insurance market. Chaucer is an underwriter operating in the Lloyd's of London market, with a particular specialism in marine insurance, and a provider of car insurance.

All insurance companies enjoyed surging profits in 2003 as premiums hit record levels, costs were kept under control and there were few big disasters to trigger crippling pay-outs. Chaucer, which has had a chequered underwriting record, has outpaced its peers because it is recovering from a low base. It has also helped itself by merging the three Lloyd's syndicates it manages, creating a bigger pool of money that is more attractive to partners who were previously worried about Chaucer's financial strength.

Pre-tax profits for the year came in at £35.8m, up from £3.0m in 2002, and the dividend was raised 21 per cent. Chaucer promises to hold that even if, as is inevitable, insurance premiums fall, and it has also set out clear targets for returns on equity. All good, and its share price of 53.5p reflects its rehabilitation in the City. But this is not the time to be investing in insurance, even the smaller players, as the sweetest spot for this sector has already passed.

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