Scottish Power on the march
The tartan giant is confident it can expand into a global player without coming to grief
Sunday 23 April 1995
"We are still evaluating these areas," he said, "but we are bristling with possibilities."
So many possibilities, sadly, that the stock market is treating its shares with a distinct air of caution. The price peaked at the beginning of last year and, apart from a brief revival six months ago, it has continued nervously downwards ever since. While analysts are reluctant to recommend selling Scottish Power, only a handful are sticking their necks out to the extent of saying "buy". Most have retreated into the neutral "hold" mode, a sure sign that the jury is out.
But Murray Stuart, the group's Scots-born non-executive chairman, insisted: "There are views among the investing community that we have the balance- sheet strength to build a longer-term business that needs to be more diverse than relying purely on the Scottish region. That would command a degree of institutional support, I know it would. Analysts take a shorter-term view."
Analysts, it should be said, are playing the odds. No British utility has diversified outside this country without scars.
Australia has got the privatisation bug, and is inviting tenders to manage the Melbourne district electricity supply. The company is looking at similar prospects in the US and other, unspecified parts of the world.
"We are not going into forbidden swamps," said Mr Stuart, by which he meant exotic or politically unstable countries. That is a comfort, but even unforbidden swamps have been known to suck the unwary into losses.
"The proof of the pudding will be in the eating," declared Mr Robinson, who spent 30 years with the engineering arm of Trafalgar House and so knows more than a little about the delicate business of competitive tendering in remote regions.
He points to Scottish Power's unblemished record in diversifing into gas, telephone systems and electrical retailers. Few utilities have successfully extended their theoretically very adaptable skills into other businesses, mainly because the outside world is nasty, brutish and considerably more competitive than the cloistered quadrangle of the regulated monopoly. Only this month Manweb, the North-west England electricity distributor, pulled out of the high street.
However, Scottish Power has been canny. It has brought in experienced retail management, not least by buying the dominant north-of-the-border electrical discounter, Clydesdale, just as it was considering a stock market flotation.
Secondly, although it has lost no time invading England, and is as far south as Peterborough, Scottish has deliberately avoided the high street. Instead it has kept to the more controllable out-of-town market.
The company has taken a similarly shrewd attitude to gas and phones. The gas is siphoned from the North Sea, where profit margins are wafer- thin, and burnt in the summer in Scottish Power's power stations.
The phone project makes use of the group's network of cables to extend phone lines into homes and commercial buildings in a low-risk venture based initially on corporate contracts.
Stuart and Robinson are the first to point out that none of this yet makes much of a contribution to annual profits, forecast by those sceptical analysts to have risen from £351m to an average of £381m in the year which ended last month, though some have scaled down below that figure to reflect last winter's mild weather.
The vast bulk of that flows from heating and lighting Scotland from the borders to a line drawn under the Highlands. Because Scottish Power and its northern counterpart, Scottish Hydro-Electric, were privatised after the English electricity industry, they were subjected to a tougher price regime, which has cut prices by 5 per cent in real terms since 1991. Because of that, they have less fear of the price review by Stephen Littlechild, the electricity regulator.
Unlike the English companies, the Scottish electricity giants have the advantage of integrating generation and distribution. That is a big factor behind Scottish Power being the industry's low-cost producer and, according to Michael Sayers at Morgan Stanley, has more cost-cutting benefit to come. That should save another £20m a year by 1998.
Although Scottish Power has excess generating capacity for its own region, as electricity is easily transmissible, it is selling an increasing amount to England and Northern Ireland.
"We are doing a lot to improve efficiency," said Mr Robinson, whose familiarisation with the company included a spell on the night shift at Longannet power station in Fife. "All the signs are that we are doing things better. We have a new management team, and the attitude among the workforce has changed out of recognition since privatisation."
On a prospective yield of 5.3 per cent, and p/e under 10, the shares offer good value, if the un-geared balance sheet does not tempt Mr Robinson into a rash takeover bid.
Electricity (from generation through transmission and supply); retailing and telecommunications.
Share price 337p
Prospective yield 5.3%
Prospective price-earnings ratio 9.6
Dividend cover 2.5 1992-3 1993-4 1994-5*
Turnover £1.5bn £1.6bn £1.7bn
Pre-tax profit £297m £351m £381m
Net profit £220m £258m £281m
Earnings per share 26.9p 31.6p 33.8p
Dividend per share 11.15p 12.4p 13.6p
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