ScottishPower sparks some interesting yields

Regent Inns is looking cheap; Too many ifs and buts around ARC

Utility companies are meant to be boring. Investors buy their shares safe in the knowledge that there will always be customers for electricity or gas or whatever. The businesses are supposed to be giant cash machines, dispensing a regular and chunky dividend. When accidents or misadventures befall a utility, it takes a while for trust to be rebuilt. ScottishPower is still in the rebuilding phase.

But it is doing well, and yesterday's results for the last three months of 2002 (the third quarter of its financial year) were better than many had dared to hope.

The company – one of two that dominate the electricity market north of the border – has missed out on the strong run for high-yielding stocks in recent years. PacifiCorp, the US electricity generation and supply group that ScottishPower bought in 1999, suffered in the wake of the Californian energy crisis. And the group upset the City by saying it will slash its dividend by as much as 30 per cent next year.

One of yesterday's highlights was the solidity of the performance at PacifiCorp, which does now seem to be on an even keel. The business is painstakingly doing the rounds of state regulators, asking to be allowed to recoup last year's extra-high wholesale power costs from its retail customers. The authorities have proved amenable to date, although the big decisions are still to come. Barring accidents, PacifiCorp should be making $1bn (£600m) of earnings (before interest and tax) within two years.

The UK market has proved a challenge, with the new electricity trading arrangements driving down wholesale prices. At least ScottishPower has got out of contracts to buy electricity from British Energy, the nuclear group, at the old, higher prices. The new deal is still not ideal, but at least is related to market rates, which ScottishPower's chief executive, Ian Russell, predicted yesterday would stay depressed for another four years.

ScottishPower shares trade on 10 times current year earnings. With two chunky quarterly payouts due before the dividend cut, and a prospective yield of 6 per cent even after that, it now looks a pretty good time to buy.

Regent Inns is looking cheap

Despite the comedy club element in Regent Inns' pubs portfolio, its investors have not had too much to chuckle about of late. The group, owner of the Australasian-themed Walkabout chain and the Bar Risa/Jongleurs comedy venues, has suffered from the sudden decline in sales at high street pubs. It warned in December that its full-year profits would miss market expectations – albeit by just £1m or so – and its share price was duly savaged. It touched a five-year low of 53.5p last month as investors swore off the booze.

What's more, a strategic U-turn that saw Regent cast aside its older, unbranded pubs in favour of large, late-night, entertainment-led venues left it floundering around with a tail of underperforming sites, which it is only just managing to ditch.

Finally, yesterday, shareholders could muster something approaching a smile at the group's half-year results. For a start, Regent maintained its dividend. Although muddied by retrenchment, pre-tax profits on the remaining pubs, before one-offs and goodwill, was £6.8m in the six months to 4 January. Turnover rose 39 per cent to £54.3m. Like-for-like sales may have been down thanks to the dogged determination of Stephen Haupt, the chief executive, not to discount, but margins at both Walkabout and Bar Risa/Jongleurs were consequently up. Proof that the brands are among the high street's strongest came from the underlying 36 per cent rise in door revenues at Walkabout. That bodes well with the Cricket World Cup and the Six Nations rugby series coming up.

Earnings growth should come from Regent's plans to press ahead and open another three Walkabouts in the second half and one more Jongleurs. If trading conditions worsen, it can use the cash to support the share price by buying back stock. The shares, up 7.5p to 64p, yield 10 per cent and look cheap. Buy.

Too many ifs and buts around ARC

After the microchip designer ARM Holdings issued a profits warning late last year, its smaller rival ARC International was always going to struggle. After all, if the highly regarded ARM had come under the cosh, ARC was also going to be in trouble, right?

What ARC needs most of all is a spurt of licensing deals, where it sells its technology for use in the latest generation of mobile devices, digital cameras and other such gizmos. Unfortunately, with business investment at a low ebb, ARC has to admit it has little visibility on future orders. It won't even quantify the size of its order book – not a good sign.

Results for the final quarter of 2002 were in line with the market's modest expectations: a pre-tax loss of £4.9m.

ARC is still confident that sales will increase quarter by quarter through this year. It has great hopes for the Asian market now it has opened new sales offices in Japan and Taiwan. In the past three months, about 6 per cent of ARC's sales came from Asia and it reckons the region could be as big a market for it as Europe by the end of this year. About 22 per cent of sales came from Europe and 72 per cent from North America.

ARC won't break even until the start of next year at the earliest, and it still has so much to prove. It is still hunting for a new chairman, and though the shares (steady at 24.5p) could benefit from a buyback later this year there are far too many ifs and buts to make it a safe bet. Avoid.