Investment Column: Splash out on defensive Severn Trent

Clinton Cards; Hamworthy
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The Independent Online

Our view: Buy

Share price: 1,222p (+18p)

It has not been the easiest of years for Severn Trent, the UK's second biggest water group. In July, it got clobbered with a £35.8m fine from the industry regulator, Ofwat, for telling the watchdog porkies at the start of the decade.

The current chief executive, Tony Wray, says the issue is now closed and the company is focused on providing its customers with a good service and investing in its infrastructure. Good, but a group that likes to boast its defensive qualities – Mr Wray reckons, probably correctly, that the recession is not a short-term worry for the company – will not have overly impressed shareholders with an 18 per cent fall in the stock over the past 12 months.

In fairness to him, such a fall is chicken feed compared to many, and he was pleased with impressive half-year numbers announced yesterday. Underlying profits were up 4.6 per cent to £262m, with full-year expectations on track.

For those still brave enough to invest in shares, Severn Trent is a compelling option. Water is one thing for which demand isn't dropping in these tough times and the group's prices are regulated, ensuring it is protected from any spike in inflation, which could hit when the economic maelstrom starts to lift.

The experts at Evolution argue the shares are cheap and that their clients should buy them, saying they will reach 1,376p. The fact the dividend was increased to 8 per cent, and will stay at 3 per cent in real terms, will excite some.

But investors should be aware debt grew by more than most experts expected. The group is also set to start negotiating with Ofwat over water charges for the five years to 2015: punters may want to see how that concludes before jumping in. That, however, applies only to the most cautious – for everyone else, now would be a good opportunity to have a splash. Buy.

Clinton Cards

Our view: Sell

Share price: 10.5p (-1p)

If there is nothing nice to say, say nothing at all, so the old fishwives' adage goes. The management at the greeting cards retailer Clinton Cards may have had that in mind yesterday when they issued a brief trading statement outlining the trouble it is facing.

For the 16 weeks to 16 November, like-for-like sales fell by 6 per cent across the group that comprises the Clinton and Birthdays brands. Managing director Clinton Lewin says the solution is to get those who visit the shops to spend more, but concedes that people are staying at home. "Trading remains very challenging and clearly reflects the current harsh economic conditions which are affecting so many businesses at this time," the statement said.

Is there any good news? Not really. Mr Lewin argues that the group had a good Halloween and he is confident Christmas will be strong. The country buys more greetings cards per capita than anywhere else in the world, he argues, adding that cards are as much a part of Christmas as turkeys and tinsel.

But there is unlikely to be any thank-you cards winging their way to Mr Lewin from investors. The stock has lost 80 per cent of its value in the past 12 months, and with the last quarter of next year being touted by some as the start of any economic recovery it is hard to see any bounce for some time. As for Alistair Darling's efforts in the pre-Budget report on Monday, "at least he is trying," says Mr Lewin.

Yesterday, watchers at Altium cut their price target for Clinton Cards from 9p a share to 2p, and this rather sums up Clinton's problem: things are tough, but it looks like they are only going to get tougher. Sell.


Our view: Hold for now

Share price: 163.5p (+0.5p)

"What more do you want us to do?" asks Joe Oatley, the chief executive of specialist marine equipment provider Hamworthy. Despite stellar interim results, a healthy balance sheet and improving margins, the stock has lost over two-thirds of its value in the past 12 months.

Hamworthy's fortunes are tied up with those of the shipbuilding sector, and while Mr Oatley accepts certain parts of that industry, such as container and bulk shipping, are troubled, given that that represents just 5 per cent of the group's sales, the shares should not have been hit so hard, he says.

The analysts agree. Those at Numis say: "The shares ... seem fundamentally cheap, trading on 4.4 times 2009 earnings per share and 1.2 times enterprise value to Ebitda. In addition, Hamworthy has £57m of net cash (about 75 per cent of its market capitalisation)."

However, the market is nervous and punters should be careful about buying unpopular shares. Hold for now.