Investment Column: There are better water punts than Northumbrian

Sportingbet; Alterian
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The Independent Online

Our view: Hold

Share price: 245.25p (-3.25p)

We have covered a number of the regulated water companies in the last few weeks and devoted readers will know that generally speaking we rather like the clarity of earnings and, of course, the dividends that most offer.

And much like Pennon yesterday, in principle we also like Northumbrian Water. The group issued its preliminary numbers yesterday, saying that sales volumes were not falling any faster than during last year, with pre-tax profits, which were down 10.3 per cent to £152.7m, ahead of expectations.

Unlike Pennon, which disclosed an increase in adjusted profits, we are not buyers of Northumbrian, however. The experts at Evolution say buy, arguing that "Northumbrian's conservative dividend payment in relation to regulated business capability means [it] is more secure than that of Severn Trent or United Utilities". We generally applaud conservatism in these markets, and indeed like the water groups for that very reason, but we are happier backing those that offer the better returns.

The finance director, Chris Green, argues that the dividend is not more conservative than others and, anyway, with business plans submitted to Ofwat for 2010 to 2015 trading, the dividend policies of all the water companies will change. Northumbrian is better than the others because of its environmental credentials and because it has been credited with a number of external awards, he adds.

Northumbrian will benefit from lower interest charges on its index-linked bonds over the next year and has seen its energy costs fall. Another plus is that Northumbrian will generate 20 per cent more of its own energy in future from its creditable renewable efforts.

Being bearish, we are buyers of the water groups generally, but expect investors to do better from others in the sector, especially Pennon. Hold.


Our view: Speculative buy

Share price: 62.5p (-1.5p)

Investors fancying a flutter should look no further than Sportingbet, the online sports betting and gaming group.

On the face of it, Sportingbet should be a raging buy. The group issued stellar third-quarter trading figures yesterday, with operating profits up 34 per cent to £9.8m. The chief executive, Andy McIver, says he is cautiously optimistic about the future. Investors who bought at the start of 2009, when the stock was wallowing around 30p, have already cashed in and, with the shares still trading at a chunky discount to the rest of the sector, ordinarily they should be worth a punt.

Most will have guessed there is a but. The company is still in talks with the US Department of Justice (DoJ), which it hopes will result in the US taking no further action against the group after the industry was in effect banned in the US in 2006.

Mr McIver says that a settlement should be reached by the end of the year. The problem for investors is that Sportingbet cannot pay a dividend until the dispute is over. "The shares continue to grow and allow investors access to the buoyant online sports betting market," argues Mr McIver. True, but punters could always buy William Hill and secure a dividend instead.

If the DoJ settlement comes down in Sportingbet's favour, the shares will spike and investors that buy now will be in clover: the dividend will start to flow, promises Mr McIver.

We think Sportingbet is worth a speculative bet, but investors should be aware that it could go horribly wrong. Speculative buy.


Our view: Buy

Share price: 105p (+5p)

While it might be true that marketing budgets are being cut left, right and centre as the recession continues, we rather like the marketing software group Alterian. More importantly, so does the market, with the stock up 5 per cent yesterday, after a rise of 87 per cent in the last quarter alone.

The company says that marketing departments are increasingly turning to its software as its success is measurable. Clearly there is more than a hint of truth in the suggestion, with the group managing to record an annual pre-tax profit gain of 48 per cent yesterday. The key, says its chief executive, David Eldridge, is that Alterian benefits from strong recurring revenues, with 60 per cent of last year's earnings to be repeated in the 2009 numbers.

The savvy punter may think he has missed the boat and that surely the gains of the last three months will not be repeated over the summer. We would tend to agree, while the analysts are split on the relative value of the stock. We would also be happier if the group was willing to share the spoils with shareholders.

Although we think the charge of the stock will slow, we reckon the shares will tick up in value, which alone should persuade the undecided. Buy.