Severn Trent may have lost its way
Victrex shares should be worth a Peek; Whitehead looks good
Wednesday 12 June 2002
Water companies are all about cost-cutting. The regulator sets a (usually harsh) five-year regime of price controls on sales to the consumer, and the companies attempt to wring as many droplets of cost-savings from the running of the business in order to keep profits afloat.
Severn Trent appears to have lost its way. While trumpeting "gross operating cost efficiencies" of £47m, it said these were offset by £36m of unexpected costs, higher insurance premiums and the climate change levy among them. To single these out as somehow unusual and aside from the normal running of the business left some investors suspicious that management aren't fully on top of costs in the main UK water business.
In fact, it is a suspicion that applies elsewhere across the group. Severn Trent has begun a programme of job reductions and factory closures in its US services business – which does environmental testing – but seems unable to say how much fat needs cutting. With continuing weakness in the US business, where it has been forced to concentrate on lower-margin routine testing. It is not clear a quick economic recovery will suffice to turn things round, as federal government spending priorities have switched markedly from environmental protection to security.
There is good progress in the waste management business, Biffa, but overall Severn Trent's shares look vulnerable to a swing in sentiment against the sector. Water company shares are in a sweet spot. Halfway between the destabilising regulatory price reviews, which happen every five years, and handing out a dividend well above the market average, they have been highly sought after this year. But this is not a reason to hold on for the long-term.
Indeed, Severn Trent's yield is the least impressive in the sector, and its dividend policy is probably the least inspiring. There is no commitment to progressive rises in the payout, simply a statement it will not be reduced to below last year's 45p. The dividend for the financial year just gone was 45.9p, a miserly 2 per cent rise. Sell.
Victrex shares should be worth a Peek
Roll this one round your tongue: polyetheretherketone. Victrex calls it Peek, and it is a unique product. Because it is highly resistant to chemicals and heat, Peek is used in washers and seals in cars, for aeroplane cabin interiors, insulation film in the electronics industry... the list is growing. In the six months to March, Victrex commercialised 135 new applications, and it has another 1,253 potential uses in development, including as parts for artificial hips and heart valves.
It is unique in another sense. It is Victrex's only product. The company, once part of ICI, has had a tough time as industrial demand has tanked. Interim results yesterday showed profits slumped to £8.8m, from £12.0 the previous year.
The company is still reluctant to predict an upturn in demand outside the Far East. The US market is only bumping along the bottom. The company should ship 1,200 tonnes of Peek this year and while that is down 25 per cent, it is a target that at least hasn't been revised down for a while now.
After that, the development work that has been occupying its engineers during the downturn should yield new sales. At 316p, the stock trades on 19 times this year's bottom-of-the-cycle earnings. Although investors should bear in mind the risks of a one-trick company, the shares look worth a peek.
Whitehead looks good
Last year was not a good 12 months for recruitment consultants. Whitehead Mann, the City's biggest headhunter, says it was the ugliest year for more than a decade. Which makes the group's underlying revenue decline of just 10 per cent pretty impressive.
Whitehead Mann puts bums on board room seats at some of the UK's biggest plcs, which makes its business less volatile than some of its peers. While companies have taken the axe to jobs lower down the pecking order, they always seem to need the same number of executives to make them tick.
Whitehead Mann's UK bias protected it from some of the horrors that led most of its rivals to issue profits warnings. Now the plan is to diversify by developing the consultancy side of its business, which so far contributes just 13 per cent of revenues. This means offering courses teaching high-flying execs how to soar even further.
Pre-tax profits fell 15 per cent to £6.3m in the year to March, despite a sales boost from two acquisitions.
Analysts are forecasting earnings growth of 10 to 12 per cent this year, a sector rarity, suggesting the shares, down 12.5p to 395p, can still climb.
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