Market Report: Watchdog concerns hurt water shares

WATER SHARES took a cold shower as the stock market fretted about the industry watchdog adopting a more belligerent attitude on prices and the costs of implementing the increasingly expensive demands of the European Community.

The leading water shares were stained red although some managed to end above their low points. Thames, the biggest of them all, fell 7p to 459p; Anglian 9p to 467p; North West 10p to 457p and Yorkshire Water 13p to 476p.

Earlier this year water shares were on the crest of a wave. They hit new highs in April with Thames, for example, reaching 563p.

Although the water profits season has lived up to expectations and there have been signs of a dividend race, the stock market has become concerned that industry prospects are deteriorating.

Next year Ofwat, the industry's regulatory authority, is due to review the water pricing formula, known as the K factor. It is understood to be prepared to demand a cut in the K factor to 2 per cent above inflation against the current 4.5 per cent. Predictably the water companies are resisting. A compromise, say 3 per cent, looks likely.

The EC demands are daunting. Thames's outlay between 1995 and 2000 could be pounds 1bn.

In recent months the market has been besotted by the heady dividend yields enjoyed by water shares. But the payments are now known and, with further cuts in UK interest rates regarded as unlikely for some time, the dividend appeal has suddenly evaporated.

Electricities turned in a dull display, compounding the utility gloom. Again the dividend bonanza is coming to an end, much of the sector goes ex-dividend in the middle of next month, and regulatory worries are never far from the surface.

The utilities are expected to at best turn in an unexciting performance, at least until the next round of profits. But Northern Ireland Electricity could flicker in the gloom. Dealings start on Monday and NatWest Securities is looking for a 20 per cent premium.

The rest of the market limped towards the end of the account with the FT-SE 100 index ending 3.7 points ahead at 2,879.4. But the FT- SE 250 index reached another high, up 2.3 at 3,215.8.

In the account the 100 index has advanced almost 50 points, with the 250 index, in a more rarified atmosphere, up 40.7.

With its pounds 1.3bn rights issue closing on Monday, Zeneca ended at 622p, up 1p, in line with the fully paid. The cash call has clearly enjoyed a favourable reception. A take- up of at least 80 per cent is expected.

The drug sector made modest headway as the Clinton administration delayed, once again, its healthcare reforms. At one time due in May they are now scheduled to appear next year. The continuing uncertainty is likely to be a drag on shares, reducing even further the prospects of drugs reclaiming their earlier more glamorous rating.

Glaxo Holdings rose 2.5p to 597.5p and Wellcome 10p to 730p. But Fisons dipped 3.5p to 171.5p.

British Aerospace greeted its reorganisation with a 12p gain to 413p but Rolls-Royce, with overseas investors straining against the 29.5 per cent ceiling, was unchanged at 150p. Moves are thought to be afoot to lift the foreign limit. In the meantime call warrants have been created by some institutions to satisfy demand.

Dalgety, the food group, remained in demand, responding to meetings with analysts. The shares put on another 7p to 469p. In busy trading Booker improved a further 7p to 388p on the management changes.

Tate & Lyle lost 6p to 375p. A strike vote at its Decatur, Illinois, plant, which supplies the soft drink industry, did the damage. But after the market closed it became known that the workers had returned and the plant was still operating.

Burton Group was little changed at 86.5p despite a sell recommendation from NatWest. The securities house believes the shares have 'run ahead of events on the back of good results and recovery hopes'.

Profits for the year to end-August are forecast at pounds 28.6m with pounds 70m pencilled in for the following year.

Ratners, with Seaq putting turnover at 19 million, had an active session, gaining 2.25p to 35.75p on the belief the group's debts have been successfully renegotiated.

Guinness was weak following downbeat presentations by LVMH, its French associate. With switching into Grand Metropolitan evident, the shares fell 11p to 484p; Grand Met rose 7p to 414p.

Cookson firmed to 112p as Nikko Securities said buy following a meeting with the industrial materials group. This year's profits are forecast at pounds 102m, up from pounds 73m, with pounds 123m estimated for next year.

British Steel encountered nervous selling ahead of Monday's results. A loss of up to pounds 170m with a 1p- a-share dividend, down from 4.5p, is expected. NatWest says sell.

BT, on hopes of a successful BT3 sale, rose 5p to 428p. Securiguard, fighting a 270p a share offer from Rentokil, rose 8p to 309p. Shareholders representing only 1.35 per cent of the capital have accepted and the offer has been extended to Friday. The market expects Rentokil to lift its bid to 350p.

The account ended with the FT-SE 100 index up 3.7 points at 2,879.4. The FT-SE 250 index rose 2.3 to 3,215.8. Turnover, inflated by the expiry of the June futures, was 712.5 million with 34,637 bargains. Settlement day is 28 June.

Intriguing developments at CRP Leisure, suspended at 7.5p. David Cunningham , who is with the stockbroker Williams de Broe, has become chairman and Alan Milton and Luke Johnson have cut their stakes. They sold at only 0.6p to RA Coleman, a stockbroking firm, which has agreed to pump in pounds 290,000 in exchange for loan stock. Mr Cunningham is already head of three quoted companies.

Stancroft Trust, controlled by Nick Berry, son of the former Daily Telegraph owner Lord Hartwell, has increased his interest in Kunick, the amusement machine and nursing home group, which is back in the black. The Berry stake is now 7.58 per cent, up from 7.17 per cent. Kunick, which made half-year profits of pounds 2m, is thought to be near to floating its nursing operations. The shares held at 10.5p.