Investment Column: Raise your glass to boring United Utilities

3i Group; Northern Foods
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The Independent Online

Our view: Buy

Share price: 496.5p (-14p)

Big, bland and a little bit boring. These are all adjectives that can be applied to the North-west water group United Utilities, with the good news being that all three mean that in these markets, the company should be a nailed-on buy for investors.

Trading is in line with expectations and the financial position of the group is robust, said yesterday's update. For investors, the news could not have been better. True, United Utilities might not be the stock for those seeking lots of growth, but all equity buyers need a solid foundation to their portfolios and United Utilities offers that.

While we would be safety-inspired buyers, investors should be aware that there are more attractive peers available. The experts at Pali say sell, pointing out that the shares are expensive relative to the other water companies.

Others are more upbeat, with watchers at Citigroup arguing: "United Utilities is currently trading at a 7.4 per cent discount to [its] regulated asset base (RAB), which gives a 15.5 per cent equity upside to RAB."

If there is any risk associated with United Utilities, and all the other water companies, it is that the group is submitting business plans to Ofwat for regulated pricing between 2010 and 2015. This could go badly, which would certainly knock the share price but considering the hot water investors could get themselves into in other industries, we do not think that this risk is a show stopper.

In these financially miserable times, we like the security offered by the water companies, and United Utilities in particular. It is not one to hold forever, but as a safe place to take cover, there can be few better. Buy.

3i Group

Our view: Avoid

Share price: 262.25p (-3.25p)

Oh, how the mighty have fallen. Before Sir Fred Goodwin stepped up to the mantle of public enemy number one, it was the private equity bosses and their taper relief-fuelled pay that captured the public ire.

But there is nothing quite like a recession to ruin a highly geared portfolio of companies. 3i, the UK's biggest listed private equity company, issued its pre-close trading statement yesterday, saying that "valuations [of the group's assets] will inevitably be impacted... by tougher general economic conditions".

The company is doing what it can to stave off the worst of the recession by selling assets and cutting net debt, but the truth is that these are truly wretched times for private equity. The entire industry depends on the availability of debt to buy companies, and with credit markets all but closed, the sector is coming up against some serious problems.

3i says that the debt reduction will "position 3i for the upturn". Investors should immediately ask, what upturn? Yes, private equity firms have done wonderfully well for punters in the past, but it would now be folly to buy the stock until we know that we are on the path to a recovery.

Watchers at the house broker Cazenove argue that "the shares... still trade on a sizeable discount of about 51 per cent to what is now a vastly more credible net asset value".

Anyone looking for a private equity stock should be interested in 3i, but we are avoiding what tends to be a volatile sector. Avoid.

Northern Foods

Our view: Buy

Share price: 49p (+4p)

People still have to eat during a recession, ergo investors would assume that a food company is a safe place to park their cash to see out the financial storm.

Of course, theory and practice are sometimes awkward bedfellows as those buying shares in Northern Foods have found. The stock had lost 47 per cent of its value in the past 12 months, and even as equity prices have performed better in the past month or so, Northern Foods' shares have continued to disappoint. That is, until yesterday when the company, which supplies food to the likes of Aldi and Marks & Spencer, issued a fourth-quarter and full-year trading statement.

Trading has been buoyant with sales up 8.8 per cent in the last three months of 2008. News that full-year numbers will hit market expectations sent the shares up 8.9 per cent, making Northern Foods one of the best performers on the FTSE 250.

So, buy? The experts at Shore Capital say pile in, pointing out that, "on our 2009-10 estimates, Northern stock trades on a 4.4 times enterprise value to Ebitda, which is too low for us".

The chief executive Stefan Barden, who yesterday bought shares, says the recent falls are due to mistakes made in the past that investors have been reluctant to forgive. Northern is changing, he says, and the group's strategy is to worry about generating cash. We think now might be the time to buy. Buy.

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