Investment Column: Severn Trent's an oasis of calm, so stay put

IG Group; Enterprise Inns


Our view: Hold

Share price: 1264p (-12p)

Reading Severn Trent's trading statement yesterday, one wonders whether the water company couldn't use a bit of public relations help. Perhaps a new agency? It all looks rather downbeat, with sales revenues falling (after the last regulatory review called for cuts in prices), interest charges rising on its long-term debt and not much benefit derived from the corporation tax cuts brought in by the Government.

However, the key line in the statement was the first one: everything is basically in line with expectations, with nothing material occurring to change this. Severn Trent's waters are as calm as a lake on one of our recent stifling, breeze-free days, which makes it a rollicking good investment proposition. With all the uncertainties afflicting the economy and markets around the world, Severn Trent looks set to continue sailing serenely along on its current course.

It won't produce any spectacular returns, and what it does produce will be a little lower than in it was previous years thanks to the aforementioned review. But, nonetheless, returns it should produce and with a consistency that will be hard to find anywhere else. We were buyers of Severn Trent at the beginning of the year, when the share price stood at 1141p. The stock has risen nicely since then – so much so that the company is no longer a screaming bargain in the field of utilities. The forecast multiple of 15.5 times forecast 2011 earnings, before exceptional items, is actually looking rather expensive, but the 5 per cent prospective yield is rock solid.

We would no longer make Severn Trent a buy, but these shares should be seen as a core part of anyone's portfolio. They should more or less maintain their value while producing a decent income, so hold.

IG Group

Our view: Keep Buying

Share price: 433.3p (-23.3p)

Europe's sovereign debt crisis has knocked the markets and sapped confidence among investors and traders alike. And yet it would be wrong to think it has been all negative for everyone. The worries have sparked volatility and that has lit a fire under the business of IG, the spread betting group which posted its full-year figures yesterday. Volatility, the company said, "boosts client activity, trading revenue and new client account opening rates".

So is it all good, then? Not entirely. The statement also bore a scrap for the bears, with IG admitting that new limits on trading with borrowed money in Japan would put a squeeze on its clients in that country and hit its revenues. The trading and regulatory environment there is "challenging".

The question, then, is whether this titbit of negative news is enough to prompt a change of heart by investors. We think not. Readers may recall that we have buying this stock, not just because of IG's growth prospects, but also because the valuation has been fairly undemanding, particularly given IG's solid record of performance.

That remains the case. IG continues to grow and the markets are likely to remain volatile for some time. The stock is on a multiple of 14 times forecast earnings for 2011, according to analysts at Collins Stewart. At the same time, the prospective yield stands at a chunky 4.7 per cent for 2011, and then 5.1 per cent for 2012, so keep buying.

Enterprise Inns

Our view: Speculative buy

Share price: 98.3p (+4.3p)

England's dire performance during the World Cup left many football fans crying into their beer. But, along with the recent balmy weather, the tournament provided a boost to sales at the UK's second-biggest pubs group, Enterprise Inns.

While average income across its estate of about 7,000 pubs was down by 2 per cent for the 42 weeks to 16 July, the trend is improving and the third quarter was flat. Enterprise Inns said it had also disposed of a further 402 of its "tail-end" pubs at a significant profit to their book value, generating proceeds of £124m in the year to date. This bodes well for the group as it plans to shed another 500 in the next financial year, as does the fact that Enterprise's freehold property estate is worth more than £5bn.

Everything is not yet rosy in Enterprise Inn's beer garden. The company still has total debts of about £3.2bn, although the bulk of this is secured until 2032. Furthermore, the company was unwilling to provide a timeframe for the resumption of its dividend after removing it in May 2009.

In November we said sell Enterprise Inns at 122.4p. However, given the improvement in current trading, falling debts and shares that now look cheap, we think the worst is more or less over. Trading on just 3.6 times 2011 forecast earnings, we think Enterprise is worth a punt for the brave investor, and rate it as a speculative buy.

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