Investment Column: Look for tastier water than Northumbrian
Opsec Security; Hamworthy
Thursday 03 June 2010
Our view: Take Profits
Share price: 284.1p (+5.7p)
The water industry is finally getting back to normal after months of flux as the regulator, Ofwat, set the prices that the industry can charge for the next four years. Notwithstanding the fact that the final determination fixed prices a lot lower than many in the industry would have liked, the outlook for much of the sector is positive.
Northumbrian Water's annual results, which yesterday beat analysts forecasts, followed similarly strong performances from Severn Trent and Pennon last week. At Northumbrian, revenue was up just 1.5 per cent at £705m but profits soared to £123m from a £12m loss last year.
The most immediate good news for investors is the dividend, boosted by 3.5 per cent to 13.24p per share. And the impact from the recession also looks to be settling down.
Heidi Mottram, the chief executive of Northumbrian Water, said: "The group is continuing to produce decent results. Income increased slightly despite the economic downturn; business closures among our customers appear to have stabilised."
There are also longer-term upsides. Yesterday's results put the company in a good position moving into the next regulatory period, from 2011 to 2015. Northumbrian has bought all of its electricity up to March 2015, removing the risk of price fluctuations which have taken operating expenditure way above targets in the past. And it has funds in place to meet all operational requirements to the end of 2011, with cash and short-term deposits standing at £189m at the end of March.
All that said, while analysts at Royal Bank of Scotland concluded earlier this year that the whole water sector looks cheap, Ambrian says Northumbrian is the most expensive stock in it – its shares gained 3 per cent in the run-up to the results. Water is a great a sector to be in but if you're in Northumbrian, take profits and switch into alternatives that offer better value, such as United Utilities or Severn Trent.
Our view: Speculative buy
Share price: 24.5p (+1.5p)
The past year has been tough for Opsec Security, a supplier of anti-counterfeiting technology and services, which had to slash costs, cut staff and consolidate two US manufacturing plants into one.
Its performance in the six months to 31 March was "severely affected" by the financial crisis as customers became less willing order its products, which include security tags used in shops and anti-counterfeiting technology embedded in laminated passports. However, sales improved substantially in the second half of the year and the uptick in trading has continued since the year-end. This helped Opsec to deliver adjusted annual operating profits of £2.5m, ahead of expectations. It also positioned itself for growth by completing a refinancing with Investcorp Technology Partners that raised £15.7m, including a £7m preferred shares placing and £9m of debt financing. The shares have more than doubled from a 12-month low of 9.50p last June and trade on 13.5 times 2011 earnings. That's edging towards pricey but there's enough here for speculative buyers to tuck a few away.
Our view: Buy
Share price: 287p (+7p)
The marine engineering group Hamworthy posted better-than-forecast full-year results but trading conditions remain challenging. The demand for original equipment from the new shipbuilding market, for instance, remains sluggish, with the company saying it is too early to tell when conditions will revert to more normal levels. On a more positive note, Hamworthy has managed to maintain margins in what is a tough market. Its balance sheet is also strong, indicating that it is a well-run company.
That said, there are grounds to be cautious. The reason is the oil and gas sector (about 80 per cent of activity is related to the production and transportation of oil and gas, according to Evolution).
Hamworthy, based in Poole, Dorset, says the fundamentals driving an increase in demand from the upstream oil and gas sector "are strong" and should lead a recovery in that market, "although the timing of any upturn remains difficult to predict". We worry that the fallout from the BP oil spill in the Gulf of Mexico could put off the recovery further than seemed likely in the recent past.
And yet we would risk buying. Hamworthy trades on 4.1 times enterprise value to earnings before interest tax, depreciation and amortisation, leaving the stock at a 30 per cent discount to the sector, according to Numis. Given that valuation gap, we think that, even if the recovery is delayed, the market will likely treat Hamworthy better than some of its peers. Buy.
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