Market Report: Investors start warming to British Gas

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Again shares failed to retain early enthusiasm, taking fright at the latest run on the pound. The FT-SE share index, at one time up 16.9 points, ended with a 6.3 gain at 2,365.7. The FT 30-share index fell 2.1 to 1,755.4. Turnover was again below the reputed 500 million break-even level at 436.9 million. Bargains totalled 23,298

CMW Group, the USM-traded architect, closed at 11.5p, down 1.5p, yesterday. Directors and an associate have picked up 210,000 shares in the past two days at up to 13p. The shares have had a rough ride this year, coming down from 80p. But CMW is being sorted out. Acquisitions to develop a rounded building services operation could materialise.

Another small stockbroker has closed. Russell Wood ceased trading yesterday. Director JCD Pilley said there was 'no point' remaining in broking as its business was 'small and not very profitable'. He described the operation as 'very old-fashioned UK'. Owned by Saudi-Arabian interests, Russell Wood will continue to manage investment funds for Middle East clients.

BRITISH GAS, the laggard of the highly popular utility shares, made up some lost ground yesterday, gaining 7.5p to 244p in often busy trading.

There is a growing feeling that the group has been overlooked as investors have rushed into utilities because of their dividend appeal. Gas, overshadowed by its increasingly acrimonious relationship with its watchdog, Ofgas, and the Monopolies and Mergers Commission investigation, is, however, likely to perform moderately well on the profit front and will almost certainly increase its dividend.

The stockbroker Panmure Gordon has warmed to the shares, classing them a buy. Kleinwort Benson has also put out a buy recommendation.

On Tuesday, Gas is due to announce its second-quarter results. On a historic cost basis there is likely to be a small profit or a loss of between pounds 35m and pounds 75m, but the figures are unrepresentative. In its first quarter Gas made profits of pounds 658m.

More important is the dividend. An increase to 6.5p is likely. Both investment houses expect a bigger payment for the year. PGk is on 14.2p and Kleinwort 14.5p. Last year Gas paid 13.4p.

Gas is the only utility to underperform the market this year. It is felt that if the MMC had not been drawn in, the shares would have joined in the fun and outperformed.

PG said Ofgas's determination to impose an 'unrealistically low rate of return on the transportation business coupled with its continuous use of the media to score negotiations points had made running the company impossible'.

Ofgas wanted a 4.5 per cent return; Gas sought 6.7 per cent.

PG said: 'Our analysis suggests a rate of between 5.5 per cent and 6 per cent will be enough to keep the current profit margins; a rate which is soothingly close to that recently given to the electricity grid.'

It adds that the Karachaganak gas field in Kazakhstan 'will become massively profitable in the next century'.

PG also believes that if the MMC suggests a break-up it will put a value of 450p on Gas shares.

The two investment houses expect Gas to make profits of pounds 1.07bn this year with more than pounds 1.2bn in the following year.

As Gas shares ended the account on a firm note other utilities, particularly the water stocks, were again in fine form, still encouraged by the defensive qualities of their dividends.

The four water stocks in the FT-SE share index have outperformed the rest of the index by 30 per cent.

They continued the run yesterday with Anglian up 6p at 436p; North West 9p at 445p; Severn Trent 13p to 419p and Thames 12p at 436p.

Electricity shares were also good, with the package, which unwinds next month, up 125p at 3,295p.

The rest of the market failed to hold its best level, with the FT-SE share index closing 6.3 points higher at 2,365.7. It has climbed 15.6 points in the account, which has been more noted for the sheer paucity of dealing than anything else.

Some, however, hope that the market has at last ended its seemingly relentless decline. But the fragility of sterling, threatening higher interest rates, could continue to erode confidence. The Tokyo revival this week has, however, helped sentiment.

Tesco was ruffled by an attempted 13.7 million placing by Hoare Govett. The securities house sought 230p a share. The price ended 4p lower at 230p.

Iceland Frozen Foods, however, drew support from County NatWest, gaining 5p to 506p. It suggested the present rating did 'not take into acount the extent of Iceland's growth characteristics and we remain buyers'.

Wellcome, with the share support operation duly terminated, rose 20p to 822p, encouraged by a sudden array of buy circulars.

Thorn EMI gained 3p to 711p in thin trading as vague rumours swirled that it was about to sell its lighting and security sides. The two operations have been for sale for some time. Tomkins was said to be the buyer of the lighting division with Williams Holdings taking the security business.

Insurance brokers remained weak. This week Sedgwick Group was forced to cut its dividend and although Willis Corroon held its payment the market expects a cut later. Willis fell 14p to 156p.

Usher Walker, the printing inks group, rose 7p to 150p. David Williams, hitherto corporate and finance director, has taken over as chief executive.

The loss-making builder Lilly continued a modest recovery. The shares reached 8p. On Wednesday they touched 4.5p. Earlier this year the price was 35p.