Investment column: Thames Water still offers value despite short- term profits ebb

IT WOULD hardly strengthen Thames Water's appeal to Sir Ian Byatt, the water regulator, to post stellar financial results just three weeks ahead of the completion of his review into the industry.

Luckily, the UK's largest water company yesterday unveiled interim profits pounds 10m short of expectations. However, the shortfall reflected higher-than- expected joint-venture interest charges and investors need not take fright.

Thames must assume Sir Ian's draft proposals - an 11.7 per cent cut in water charges and a pounds 2.2bn investment obligation - will be made concrete when he publishes his report on 25 November.

Although analysts see the proposals slashing profits by 25 per cent next year, yesterday's results provide much reassurance.

Thames Water's non-regulated businesses, which include operations in the Turkish earthquake zone and Indonesia, are growing strongly. They increased profits by 22 per cent to pounds 29m - 15 per cent of the total. That confirms Thames Water's strength in securing high-margin business in areas of geological and political risk.

Replicating the success should not be hard - Thames charges a fee for its expertise and makes no capital expenditure.

In the half year, the group secured three new contracts and says it foresees several major ones in the coming months. Estimates value the global water market at pounds 150bn.

On the downside, Thames' ability to grow substantially by acquisition appear limited by the balance sheet, forecast to be geared at 75 per cent come the year end. Bill Alexander, the chief executive, says he has no plans to make UK acquisitions - in any case precluded by Sir Ian for the time being - though the US may offer some small opportunities.

Meanwhile, doubt surrounds the level of likely dividend cut following Sir Ian's impositions. Some analysts expect its historic growth rate of 9 per cent to fall to 5 per cent. Still, that preserves the shares' status as a decent yield play.

Credit Lyonnais expects pre-tax profits of pounds 417m and earnings of 82p per share this year, falling to pounds 310m and 79.6p in 2001, putting the shares, down 9p at 881p, on a forward price-earnings ratio of 11.

The prospect of a re-rating when regulatory uncertainty is removed, and the fast-growing international business make the shares a buy.

Start your day with The Independent, sign up for daily news emails
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific