Investment Column: SSE is solid but its ambitions are a worry

Mitchells & Butlers; Spectris

Our view: hold

Share price: 1073p (-28p)

There was a solid set of numbers from Scottish & Southern Energy yesterday, whose shares fell largely on profit-taking after a strong run over the past few days. Adjusted pre-tax earnings rose 2.9 per cent to £1.29bn, while the company also announced a new dividend policy, planning to pay a minimum of 2 per cent above inflation.

This is lower than the previous policy but is in line with expectations. And it should be noted that with the payout being linked to retail price inflation, investors may end up with a very strong yield down the line, possibly as high as 7 per cent one year out, according to Credit Suisse, if RPI continues to rise at the current rate. So there is much to like about the company from an investment perspective.

There are some worries about the amount of capital expenditure relative to the levels of growth. But we think the market has already factored the key concerns into the share price, with SSE trading on multiples of less than 10 times forward earnings. That's hardly expensive even with SSE's talk of an "uncertain" outlook. In fact, it's possible to argue that the market is being too harsh on the shares.

A buy, then? Not quite. Notwithstanding its strengths, we think SSE's shares may struggle to make much headway until there is more clarity on the company's bid, made via a joint venture with a Canadian infrastructure fund, for EDF's UK electricity distribution business. The preferred bidder is expected to be announced by the end of June and if SSE's gambit succeeds, the shares may struggle amid concerns over the cost of the assets and the potential for a cash call to fund the deal. Long term this is solid investment, but for now, until we know more about the EDF situation, we would just say hold.

Mitchells & Butlers

Our view: Hold

Share price: 318.5p (-15.1p)

M&B, the owner of the All Bar One and Harvester chains, provided a ray of sunshine to brighten up a gloomy market yesterday. You can argue a bit about the way it presented the numbers (a 33-week period was given to reflect a late Easter), but the key point for us is that even with a reduced level of promotions, overall like-for-like food and drink sales grew 4.3 per cent and 0.3 per cent respectively against an industry-wide fall in pub food sales of 5.2 per cent and a fall in the on-trade drinks market of 4.9 per cent. Profits (at the operating level) grew 12.2 per cent to £156m and 55 per cent at the pre-tax level to £73m (after debt interest). At £2.5bn the level of that debt is scary, but it is at least falling.

In September we were holders at 274.6p, and we've been rewarded. Still, we're reluctant to advise buying more at this level, chiefly because the forthcoming fiscal squeeze will take a lot of money out of the pockets of a lot of people. With pay freezes coming in the public sector and tax rises for all, consumers may rein in, so M&B's strategy of raising the quality of its menus to reap a greater spend for its customers may struggle if people start to pinch pennies again. That said, the fact that M&B has grown its business in a shrinking market is highly credible and it could benefit if the Government throws a bone to the "broken society" brigade by clamping down on all those supermarket alcohol promotions.

At around 11 times forecast 2010 earnings, the shares are hardly cheap given the risks and there's no yield either. But, with the prospect of stability at the corporate level after the recent boardroom upheavals and the group's proven ability to outperform when times were even more difficult than they are today, we would stick with M&B for now. Hold.

Spectris

Our view: Hold

Share price: 860p (-23p)

A little less than 18 months ago, when the economy was in dire straits, we said that investors would do well to hold on to shares in Spectris, the FTSE 250 electronic instrument and control maker. At the time the chief executive, John O'Higgins, instead argued that a punt on the stock was a bet on the global recovery and that Spectris was a proxy for what would be a recovering stock market.

Mr O'Higgins turned out to be right. The group's shares are now worth about twice as much as they were when we last looked at them, and yesterday the group said that like-for-like sales increased by 6 per cent in the four months to the end of April. Despite getting it wrong last time, we would again be holders. Trading on a 2011 multiple of about of 8.5 times, Spectris is in line with its peer group, while the dividend yield, at an estimated 2.9 per cent this year, is solid but not incredible. We reckon that Spectris is a good company, but the best is probably over. So hold.