Investment Column: Hold on to dull but worthy United Utilities
Immedia Group; Songbird Estates
Friday 24 September 2010
Our view: Hold
Share price: 573p (-0.5p)
Investors do not look to water companies for short-term thrills, and the sector does not disappoint. Yesterday's half-year trading update from United Utilities is a case in point. It confirmed that the company is trading in line with forecasts. And the nearest thing to excitement – the five-year regulated pricing settlement imposed by Ofwat last November? Well, it is panning out as anticipated.
United is Britain's largest listed water company, with seven million customers in the North-east of England. In line with the Ofwat settlement, it is being forced to cut prices by 4.3 per cent in the first year, and it is on course to report a lower operating profit this year than last.
But it is working hard to cut costs, improve efficiency and ensure that it returns to growth. In the short term, its chief executive, Philip Green, is selling out of all non-regulated activities. United has disposed of £600m of assets around the world in the past 12 months. With the consistent focus on core activities and the low cost of its debt portfolio, Mr Green said yesterday that United was "well positioned to deliver outperformance over the 2010-15 regulatory period".
Even with this year's lower profit, and the full-year dividend reduced by 12.5 per cent to 30p, United Utilities is an attractive stock.
Jonathan Jackson, the head of equities at Killik & Co, said: "For those investors looking for a degree of protection against inflation over the next five years, United Utilities is a worthwhile investment and currently offers a 5.3 per cent prospective yield."
For investors moving into utilities from elsewhere, there may be better options. But for existing holders of United Utilities, the outlook is reliably stable, so hold.
Our view: Sell
Share price: 8.5p (-0.5p)
Readers of a certain generation may well remember the vinyl-spinning antics of Bruno Brookes, the former Radio 1 disc jockey. Investors in his Immedia Group, which provides bespoke radio stations for shops, may not be quite so enamoured.
The shares were placed at 113.5p when the company listed on the Alternative Investment Market in 2003, and hit a peak of 121p the following year. But that was as good as it got, because the stock price fell as fast as Chesney Hawkes's singing career, to 24p in 2006. The shares are now sitting at about 9p with little prospect of much upside. And Immedia's results for the first half of the year were hardly music to the ears yesterday.
It is a tough time for the company. The radio industry has been struggling for a while, and the retail environment still bears the scars of recession. Immedia reported yesterday that its first-half operating loss had widened from £40,615 in the first half of 2009 to £100,375 this year. Revenues retreated slightly to £1.71m.
Brookes, who is chief executive of Immedia, said the results reflected the "difficult conditions prevailing in the UK" as well as a change in the mix of business. He said the company had slashed its costs and was looking forward to the launch of a new service before the end of the year. That mystery launch may be Immedia's salvation but we remain sceptical. Sell.
Our view: Buy
Share price: 146.5p (-11.5p)
Shares in Songbird Estates fell by about 7 per cent last night following the release of the property company's half-year figures, but the slide had more to do with fresh plans for a cash call.
The group, which owns most of the Canary Wharf complex in London, detailed a fully underwritten open offer to raise net proceeds of £135m. The money will be used to refinance a £135m shareholder loan from the time of the company's fund-raising last year. Importantly, it removes an overhang and allows Songbird to simplify its balance sheet, which is positive news.
In terms of performance, its net asset value of 178p per share at the end of June was lower than some expected. But, as Evolution highlighted, it made sense, given that Songbird took a hit from the lease incentive on the Lehman Brothers building being written off.
We await more detail on JPMorgan's site at Riverside South. Reports that the US investment bank may leave the premises and move into the Lehman building at 25 Bank Street were noted in The Independent earlier this month. But if JPMorgan does change its plans, given the previous writedown on the value of the property and assuming comparable valuations and a lease of 15 to 25 years, Songbird's NAV could rise by about 20p to 25p per share, according to analysts at KBC.
This, coupled with the fact that the shares continue to trade at a chunky discount to NAV, points to a buy.
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