Investment Column: Severn Trent may be a rare rose in winter

PZ Cussons; Porvair

Our view: Buy

Share price: 1141p (+4p)

Phew. What a long, tempestuous, haul it was for water companies as the regulator Ofwat drafted and re-drafted its price determinations for the next five years. Now the dust is finally starting to settle.

Yesterday, Severn Trent issued a management statement for the four months from October to January, confirming that trading was in line with expectations. The declines in demand recorded last year during the recession are beginning to stabilise, and the year-on-year drop in revenues is now expected to be between £5m and £10m, rather than the £15m to £20m that was originally forecast.

Everything else remains much as it was, with bad debts at about 2.3 per cent of turnover, and capital expenditure for the year to be £610m to £630m. The even bigger issue for the stock is last week's decision to accept the Ofwat price ruling published in November, rather than appeal to the Competition Commission.

In fact, the watchdog finally agreed a less punitive settlement than that it originally put forward, but it was still sufficiently testing for watchers to be predicting rights issues and a 20 per cent re-basing of the dividend. Except that Severn Trent's chief executive, Tony Wray, has now confirmed that has no plans for a rights issue, although it is cutting the dividend by 10 per cent.

Overall, the water sector underperformed last year, even as a low-yield, safety investment, because of the uncertainty of the price determination. Severn was more oversold than most. With the future now certain, the only cloud over Severn's immediate future is the cost of bringing leakage rates back down after the frost damage caused by the recent cold snap.

But most analysts think it is a risk worth taking. Ed Woolfitt, the head of trading at Galvan Research, said that unless the extreme winter made leakage levels even wrose, Severn Trent shares, which trade at about 1.5 times next year's earnings and yield more than 5 per cent, could be expected "to progress steadily higher". Generally we are bearish about the water sector, but Severn Trent could be a rose among thorns. Buy.

PZ Cussons

Our view: Buy

Share price: 250p (+3p)

Cussons has been a real star for this column. When we last said "buy" in June, it stood at 182.5p. Since then, its shares have soared. Over the past year they have shot up 67 per cent, outperforming a 28 per cent rise in the FTSE All Share Index. That makes it looks like a technology superstar, but PZ is best known for making soap and shampoo. Perhaps there's something in this idea of running a company well and steering clear of too much debt.

Yesterday's numbers were ahead of expectations, with pre-tax profits up 21 per cent at £44.7m, and things look to be going in the right direction. We wouldn't be too worried about acquisition talk – adding new brands and improving geographic spread beyond the core markets of the UK, Indonesia, Australia and Nigeria looks sensible to us.

Time to take profits then? Maybe not. The shares trade on just under nine times next year's forecast earnings, which in global terms makes the company looks relatively cheap. While Britain looks torpid economically, the levels of world growth forecast should help PZ Cussons's sales. This year, its revenue increased by 0.7 per cent to £370m. The share price increase has slowed recently, but with a rising dividend and cash in the bank there is arguably more to come, so keep buying.


Our view: Hold

Share price: 55.5p (-4.5p)

Porvair, which designs and manufactures specialist filters for a variety of industries, yesterday reported a disappointing £1.7m in full-year profits before tax and one-offs, down from £4.2m in 2008. However given the economic slump, the decline in profitability in the 12 months to the end of November is perhaps unsurprising.

The key drag was Porvair's metals filtration division, which took a hit in the first half of the year as destocking in the aluminium and the US automotive markets sapped demand.

That was then, though. The business has since picked up the pace. The £1.7m in profit was almost entirely generated in the second half, as the benefits of the company's moves to reduce its costs coincided with the passing of the worst of the global recession. And though the overall economic picture remains fragile, conditions in Porvair's end markets seem set to improve further.

The valuation makes us pause a bit. Porvair trades on a steep multiple of 20.9 times Altium's forecasts for 2010. That said, the shares are off their highs, and the company's earnings could recover quickly. There's enough here to make Porvair worth holding.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?