Investment Column: Not time to wade into Pennon's waters

Paypoint; Young & Co


Our view: Avoid

Share price: 633p (+8p)

After the high excitement surrounding Ofwat's five-year price review, concluded last November, some semblance of normality is returning to the water sector.

Notwithstanding the imposition of a £1 real-terms cut for every customer of Pennon subsidiary South West Water's bills by 2015 (compared with the company's request for a £5 rise), Pennon Group's first-half results, published yesterday, still managed to beat analyst expectations.

Revenue was up by more than 10 per cent to £593m and pre-tax profits up by 0.7 per cent to £96.2m. Better still, an interim dividend of 7.5p per share represents an increase of a tasty 7.9 per cent, all part of the policy to raise the dividend by 4 per cent above inflation every year to the end of 2014/15. Within the group totals, South West Water managed a mere 0.6 per cent squeeze on profits from the new price settlement, thanks to a dry summer that boosted earnings by some £7m above analysts' expectations. Meanwhile, Pennon's waste management business, Viridor, recorded a whopping 29 per cent profits rise in the most recent results.

The outlook for the second half is less robust as seasonal factors – such as the boost from the dry summer weather – phase out. But cost-cutting at South West Water, and opportunities from Government targets on landfill, recycling and renewable energy for Viridor, all offer longer-term uplift.

Pennon is not an unattractive stock with the highest dividend growth policy in the sector. It is the water stock most likely to be able to continue this growth beyond 2015. It is also least exposed to inflation, due to the dilutionary effects of Viridor.

But, in the aftermath of the pricing debates, the sector is looking, dare we say it, boring. In January, we recommended Pennon investors take profits. It is not yet time to buy back in. Avoid.

Paypoint

Our view: Hold

Share price: 320.25p (Unchanged)

Investors familiar with Paypoint could not have missed the massive share price spike in July. The stock jumped by more than 30 per cent on the day the National Lottery Commission (NLC) said it was provisionally minded to turn down Camelot's plan to offer activities such as mobile top-ups, bill payments and other services through its lottery terminals.

The nod would have been a headache for Paypoint, which offers similar services. We are still waiting for the final decision, however, and though Paypoint says it is well prepared either way, we think a change in the provisional stance would be negative for the shares.

That said, Paypoint is currently on a firm footing. Yesterday's interim results showed that pre-tax profits were up 5.4 per cent to £14.6m. The interim dividend was raised by a similar amount to 7.8p and the company said that, compared to the first half, it expected bill payment volumes to expand over the second.

The valuation is also supportive. Paypoint trades on multiples of under 10 times UBS's forecasts for next year, under 9 times on the broker's numbers for 2012 and under eight times on its estimates for 2013. This is not an expensive stock. But we worry that it will only tread water over Christmas and in January as the market awaits the NLC's final ruling. Hold for now.

Young & Co

Our view: Hold

Share price: 580p (+35p)

Young & Co's Brewery bought a couple of pubs in the first half of the year, but investors are waiting for news of a more significant acquisition. The management reiterated yesterday that it was looking to buy and the value of the stock will depend on the terms of whatever deal emerges.

Meanwhile, Young's showed an impressive underlying performance in its half-year results with profits up 8 per cent, beating City forecasts. The group trades well in London which helped drive like-for-like managed pub sales up 0.8 per cent. With gearing of 36 per cent it also has one of the sector's stronger balance sheets.

Unusually for an Aim stock, Young's has increased its dividend for each of the past 14 years, with an estimated full-year yield of 2.4 per cent. The stock trades on 18.8 times estimated 2011 earnings, which looks pricey but is in line with peers. The outlook for the pub industry is not particularly rosy, however, with tax rises, job losses and the Government's austerity programme hitting customers' pockets. Young's is a sector star so, while buying now is risky, we'd keep holding.

PROMOTED VIDEO
Arts and Entertainment
On set of the Secret Cinema's Back to the Future event
filmBut why were Back to the Future screenings cancelled?
News
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Sport
Lewis Hamilton walks back to the pit lane with his Mercedes burning in the background
Formula 1
Arts and Entertainment
The new characters were announced yesterday at San Diego Comic Con
comic-con 2014
Sport
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
football
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
No Devotion's Geoff Rickly and Stuart Richardson
musicReview: No Devotion, O2 Academy Islington, London
News
i100
News
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on
Edinburgh Fringe 2014: The comedy highlights, from Bridget Christie to Jack Dee

Edinburgh Fringe 2014

The comedy highlights, from Bridget Christie to Jack Dee
Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride