Investment Column: Drink in Northumbria's income stream

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The Independent Online

Northumbria

Our view: Hold

Share price: 245p (+5.75p)

Apologists for water stocks point to reliability of demand. Northumbrian Water Group is no different. Yesterday's interim management statement – forecasting revenues of £4m in the second half, 1 per cent lower than in the six months to September – blames the dip on the economic downturn. The company confirms that in all other particulars it is very much "business as usual" and the expectation for the full year to March remains on track.

So far, so good, but there are two big uncertainties. First is the impact of the recession. Northumbria may have dropped little so far, but rival Severn Trent warned earlier this month that lower industrial water consumption could take up to £25m off revenues in the current year. Second is the outcome of the regulator's five-year price review. The process, to conclude at the end of the year, will set a framework running from 2010 to 2015. Uncertainties over usage patterns and inflation make it hard to predict what will happen.

Northumbrian is still in as good a position as any. It has £307m in cash, and debt is expected to be £2.2bn by March, no material increase from the half-year figure. The outlook for dividends is also comfortable, with analysts predicting easy maintenance of 3 per cent per annum for the next few years. Lakis Athanasiou, at Evolution Securities, said: "Northumbrian has the safest dividend in the sector."

Water companies are not exciting. But in these febrile times, that is perhaps a good thing. Hold.



Close Brothers

Our view: Buy

Share price: 512p (-3p)

Close Brothers, the London-based investment bank, yesterday named a new chief executive. Preben Prebensen, who joins from the insurer Caitlin, where he is chief investment officer, will take over formally on 1 April. Mr Prebensen, 52, has experience of banking, having spent 23 years at the US-based investment bank JP Morgan, in a variety of corporate finance posts. He has also run a listed company before, having been chief executive of the insurer Wellington Underwriting from 2004 until the sale of the company to Caitlin in 2006. So, while we will need to see him in action before we can properly judge his tenure, the new man ticks the theoretical boxes.

Close Brothers' shares have lost about a third of their value in the last year. While that's a lot less than many retail banks, as well as multi-service investment banks such as Goldman Sachs and Morgan Stanley, Close Brothers does not really fit the heavy-lending or trading-focused risk-taking model that have landed other banks in trouble. A better peer for comparison, therefore, might be Lazard, which has a similar corporate advisory focus. Close Brothers' shares, trading at just over 9 times expected earnings, are a whopping 50 per cent cheaper than Lazard's, priced at almost 15 times. Close can bank on a strong restructuring practice. And this is the time of the cycle that such a business comes into its own, with mandates for debt-holders eager to restructure borrowers a dime-a-dozen in these hard times. Buy.



Individual Restaurant

Our view: Hold

Share price: 18p (unchanged)

Investors at Individual Restaurant Company (IRC) have suffered severe indigestion over the past 12 months as its shares have plummeted by 78 per cent. The group, which operates 23 Piccolino restaurants and 11 Bar & Grill outlets, yesterday warned that its full-year pre-tax profits would be towards the "lower end of the current market range", but said its Ebitda would be in line with market consensus of a marginal increase to £5.3m for the year to 31 December 2008.

In fact, IRC's pre-close trading update contained a few morsels to whet the appetite of brave investors. While trade became more difficult as the second half of the year progressed, "conditions strengthened over the critical Christmas period". The group said it had also continued to avoid discount-based promotions, leading to no erosion in its December gross profit margin against the same period last year.

The shares, which trade on an estimated 2009 price to earnings ratio of 6.9, look relatively cheap compared with some sector rivals.

Overall however, the group expects 2009 will be tougher than last year, and that its gross margins will come under pressure as suppliers seek to pass on price increases to offset the weakness in sterling. While IRC may have solid long-term prospects, it faces a battle to attract customers through its doors during the consumer recession that is likely to last well into 2010.

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