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.

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