ScottishPower lights up for income

Avoid a shipwreck, stay away from Arc; Wait for Innovation before rushing in
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The Independent Online

ScottishPower has put as much energy into generating customers as it has the electricity to light up their homes. It has topped 4 million in the UK, largely thanks to the advent of internet price comparison charts where, currently, it scores well against competitors.

ScottishPower has put as much energy into generating customers as it has the electricity to light up their homes. It has topped 4 million in the UK, largely thanks to the advent of internet price comparison charts where, currently, it scores well against competitors.

Leave aside that such price transparency will put long-term pressure on profit margins, as customers shop around for the best supply deals. For now at least, ScottishPower is a net winner, since internet customers almost always pay by direct debit and are cheaper for the company to deal with. This is a company that can still trumpet impressive organic growth at home, as well as cost efficiencies and growth through opportunities abroad.

The UK businesses, which span electricity generation and transmission and the supply of electricity and gas to homes, were the star performers in the last three months of 2003. The rebound in wholesale electricity prices was a big factor. Across the group, pre-tax profits rose 4 per cent, taking the total profits for the first nine months of the group's financial year to £553m, up from £483m at this point last year.

Strong numbers, but shy of what the City had expected. The main disappointment was PacifiCorp in the US. Don't worry about a return to the disasters of 2002, though, since the discrepancy seems mainly to do with the timing of royalty payments and complicated accounting rules on currency hedging. PacifiCorp is still on track to add $1bn (£546m) to earnings in the next financial year.

In fact, ScottishPower has done well to mitigate the effect of the falling dollar on sterling profits, thanks to its hedging.

The company's disappointing decision to slice its dividend by a third is now some distance behind it and it does seem there are profitable uses for the cash. In particular, its unregulated PPM business in the US is set to start generating real returns from investments in wind farms by this time next year.

With price rises likely to be allowed in the US, too, the growth story is on track and the dividend should rise quite rapidly. A yield starting at 5.5 per cent this year is attractive.

Buy for income.

Avoid a shipwreck, stay away from Arc

The great deluge unleashed on the technology sector after the sins of the boom-years has spared few companies, and Arc International was certainly no safe haven. Indeed, it was one of the youngest players in the field of microchip design (where Arm Holdings is still the star), and suffered particularly hard as potential customers in electronics scaled back their investments. It has so far failed to establish its products on the scale needed to turn a profit.

So yesterday another cull of staff, another strategic review. The new chairman, Peter van Cuylenburg, will certainly improve matters by reducing cash burn and taking a more pragmatic approach to design work. He is hoping to integrate Arc's chip technology more closely with partners', making it more desirable to customers.

So far Arc's intellectual property is used in 20 products such as digital camera flash memory cards, shipping 9 million units, each of which earns a royalty for the company. These numbers should rise, but Arc's focus in digital media, wireless connectivity and networking cannot equate to the sort of opportunity that turned Arm's chips into the standard for the world's mobile phones. Talk of a break-even position this time next year trusts a lot to luck and the £37m cash pile is dwindling fast.

It's a cruel call, but Arc still looks less like the Holy Grail, more like a shipwreck.

Wait for Innovation before rushing in

What can you say about The Innovation Group, the technology company whose shares have shot up from 5p to 38p in less than a year? The obvious answer is "sell" - if you happen to be one of the lucky people to have enjoyed much of this rally.

It has been driven by the market's belief in an imminent rebound in technology spending. Oh, and the appearance on the share register of Robert Bonnier, the financier who reckons he has spotted a way to make a quick buck.

But one year on from a rights issue and the introduction of a new top management team, Innovation does seem to be delivering on its promises. Yesterday the company - which sells technology solutions to improve efficiency in insurance and related industries - announced a profit before tax and amortisation of £1.3m for the last three months of 2003, on turnover which fell by £2m to £13.8m.

Reversing the effects of the over-diversification in which its founders indulged at the height of the boom, Innovation was able to tick a number of boxes. Cash generation was £1m and it has a cash balance of £11.7m. It made a profit of £600,000 on the sale of a 50 per cent stake in a non-core business, promising to keep to its knitting from now on.

Analysts at Investec reckon that while changes are evident they are priced in, and it issued a hold recommendation. Long-term, it seems reasonable to believe that a new enthusiasm for technology investment will encourage insurers to spend more with Innovation, but despite the hype, the recovery is still relatively young.

What is needed next from Innovation is a good deal more clarity on the likely growth of orders for its suite of products. While the stock (38.25p) looks interesting, potential newcomers to the share register need not rush in just yet.

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