Take up the United Utilities rights

Galliford Try must work harder to give value; McBride investment in Europe needs more time to pay off

Shareholders in United Utilities, the North-west England water and electricity goliath, have until next Wednesday to mull over the group's unexpected and complicated £1bn rights issue, and decide whether to fork out for the first tranche of new shares. They should decide to take up the rights.

Shareholders are being asked to subscribe initially for five "A" shares for every nine ordinary shares they own. The "A" shares will cost 165p apiece and be worth half an ordinary share - that is, half last night's close price of 470p. "A" shares will be entitled to half the dividend and give holders the right to subscribe to the other half of the issue in 2005, also at 165p.

Their stock has tumbled in value since the rights issue was announced because there will be significant earnings dilution when the new shares are issued. The value of the "A" shares, then, will fluctuate in accordance with the main UU price, only more violently. Given the UU price has been temporarily depressed by hedge fund activity, the chances are it will snap back sharply after the rights issue proceeds come in and "A" shareholders will be able to cash in on a tidy sum.

Longer term, the picture is cloudy and investors will need to be canny in choosing a moment to take profits. The "A" shares have a stonking 12 per cent-plus yield, which no doubt argues in favour of keeping them for as long as possible, but uncertainty over the future will grow next year.

It is far from clear that the cash-call will alleviate the need for a dividend cut when the next five-year price regime is agreed with the regulator. On most analysts' calculations, debt levels are likely to stay too high unless Ofwat is hugely generous. With the stock market moving back into growth mode, UU is likely to prove an unattractive investment as the price review gets into full swing.

But there is a good chance the company will be allowed a one-off rise in water bills next year because of the costs of infrastructure investment it has made in recent years. This could support the shares, "A" and ordinary, in the short term and make taking up the rights a good bet.

Galliford Try must work harder to give value

Galliford Try was formed in 2000 from the merger of Galliford, principally a construction company, and Try, principally a housebuilder. But it seems that mixing G and T has left the new organisation nursing something of a hangover.

A series of cost overruns on construction projects left that division - about 75 per cent of the group - in the red, and the small housebuilding outfit has also been a disappointment.

By focusing on public sector work, the company hopes to avoid being burnt again on higher risk commercial ventures. But margins are not likely to be more than 1 per cent, which leaves no room for the sort of errors this company has a history of making.

The housebuilding division was depressed this year by problems with planning approvals, and a fall in production (from 899 homes a year ago to just 741), which meant it did not take full advantage of the increase in average selling prices. This rise was 13 per cent, to £200,000, as it moved upmarket. But while production will be up to about 800 next year, the overall profit result is likely to be flat at best.

It's a really unappealing cocktail and, while the shares closed up 1.25p at 39.75p yesterday, there are more ambitious companies which offer better value for money. Avoid.

McBride investment in Europe needs more time to pay off

The Tesco own-brand washing powder, Asda toothpaste or Sainsbury's bleach in the cupboard at home may well have been made by McBride.

Such supermarket brands account for almost a quarter of sales of so-called "household products" in the UK, which pioneered the phenomenon.

It is a pretty mature market here now, not many more customers are going to be tempted away from their Daz or Colgate, no matter how much value for money they get. The trick, McBride has decided, is to position itself in Europe where the phenomenon is at a much earlier stage.

It looks like it could be a smart move, but European grocers are only slowly starting to consolidate. McBride boosted sales in France, its second largest market, by 5.2 per cent in the year to 30 June, and overall sales growth in continental Europe of 8.6 per cent was partly as a result of the stronger euro.

McBride invested heavily to get to this point, took debt to uncomfortably high levels and took its eye off the main business in the UK. Because supermarkets demand lower and lower prices from their suppliers, wafer thin margins can only get thinner unless a constant round of efficiencies are introduced.

Happily, such efficiencies proved the highlight of yesterday's figures and there are more to come. Cash is pouring into the group, debt is down from £95m to £61m, and interest payments are now covered more than eight times. There was enough confidence to raise the final dividend by 50 per cent (although the shares - up 5p to 114.5p - still yield less than 3 per cent).

McBride has a difficult balancing act to perform, expanding in a slow-moving European market while defending its leading position in the UK. Only a hold.

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